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Charles P. Jones, Investment: Principles and Concepts, Twelfth Edition, John Wiley & Sons test bank.
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Charles P. Jones, Investment: Principles and Concepts, Twelfth Edition, John Wiley & Sons.
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File: Ch. 10, Chapter 10: Common Stock ValuationMultiple Choice Questions
1. Relative valuation measures commonly used by market participants today include:
a. P/E ratio, Price/Book Value, and Sales/Price ratios
b. Earnings per Share ratio
c. Discounted Cash Flow
d. Residual Income Valuation
Ans: a
Difficulty: Moderate
Ref: Overview
2. The estimated value of common stock is the:
a. present value of all expected cash flows.
b. present value of all capital gains.
c. future value of all dividend payments.
d. present value of all dividend payments.
Ans: a
Difficulty: Moderate
Ref: Discounted Cash Flow Techniques
3. Discounted cash flow techniques used in valuing common stock are based on:
a. future value analysis.
b. present value analysis.
c. the CAPM.
d. the APT.
Ans: b
Difficulty: Easy
Ref: Discounted Cash Flow Techniques
4. All of the following are interchangeable terms except for:
a. discount rate
b. coupon rate
c. required rate of return
d. capitalization rate
Ans: b
Difficulty: Moderate
Ref: The Dividend Discount Model
Chapter Ten 119
Common Stock Valuation
,5. Which of the following is a problem using the dividend discount model to
value common stock?
a. The model does not account for the risk of the stock.
b. The model does not consider the present value of the dividends.
c. The model does not consider that dividends may not be paid
d. The model does not account for small dividends.
Ans: c
Difficulty: Moderate
Ref: The Dividend Discount Model
6. Infinite growth is a problem with the dividend discount model because:
a. The expected stream of dividends is infinite
b. At reasonably high discount rates, such as 12 percent, dividends received in the distant
future (40 or 50 years from now) are worth very little today
c. Dividend growth rates eventually become very small
d. The statement is incorrect – infinite growth is not a problem with the dividend discount
model because at reasonably high discount rates, such as 12 percent, dividends received
in the distant future are worth very little today
Ans: d
Difficulty: Moderate
Ref: The Dividend Discount Model
7. The constant growth dividend model uses the:
a. historical growth rate in dividends.
b. historical growth rate in earnings.
c. estimated growth rate in dividends.
d. estimated growth rate in earnings.
Ans: c
Difficulty: Moderate
Ref: The Dividend Discount Model
8. The zero-growth dividend model:
a. gives the highest value for a common stock.
b. is the most accurate model to use.
c. is equivalent to the valuation model for preferred stock.
d. assumes the highest required return possible.
Ans: c
Difficulty: Easy
Ref: The Dividend Discount Model
Chapter Ten 120
Common Stock Valuation
, 9. The dividend model that is most appropriate for a young company that
pays small dividends now but is expected to increase dividends in a few
years is the:
a. zero-growth model.
b. constant growth model.
c. expansion growth model.
d. multiple growth model.
Ans: d
Difficulty: Moderate
Ref: The Dividend Discount Model
10. Under the multiple growth model, at least ------ different growth rates are used.
a. two
b. three
c. four
d. five
Ans: a
Difficulty: Easy
Ref: The Dividend Discount Model
11. The constant growth rate model of the DDM implies that:
a. earnings are not relevant to stock prices.
b. the payout ratio remains fixed.
c. the stock price grows at the same rate as dividends.
d. the growth rate in dividends equates to zero (i.e., dividends remain a “constant”
dollar amount over time).
Ans: c
Difficulty: Difficult
Ref: The Dividend Discount Model
12. Which of the following is not one of the reasons two investors both using the
constant growth version of the DDM on the same stock might arrive at different
estimates of the stock's value?
a. They used different expected returns.
b. They used different growth rates of dividends.
c. They used different required returns.
d. They assume a different payout ratio.
Ans: a
Difficulty: Moderate
Ref: The Dividend Discount Model
Chapter Ten 121
Common Stock Valuation
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