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Fin 334 Test 2 Ch. 8 || with 100% Correct Answers.
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The single most important issue in the stock valuation process is a company's correct answers expected future returns. The value of a stock is a function of correct answers future returns. Which of the following variables affect the P/E ratio? I. capital structure of a firm II. amount of di...

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Fin 334 Test 2 Ch. 8 || with 100% Correct Answers.
The single most important issue in the stock valuation process is a company's correct answers
expected future returns.

The value of a stock is a function of correct answers future returns.

Which of the following variables affect the P/E ratio?
I. capital structure of a firm
II. amount of dividends paid
III. inflation rate
IV. earnings rate of growth correct answers I, II, III and IV (All)

High P/E ratios can be expected when investors expect correct answers a high rate of growth in
earnings.

Which of the following will most directly influence a company's market value? correct answers
Its future cash flows.

List the key variables that affect the P/E ratio and explain the relationship between each variable
and the P/E ratio correct answers (a) growth rate in earnings; the higher the growth rate, the
higher the P/E ratio
(b) general state of the economy; the better the economic outlook, the higher the P/E
(c) amount of debt in a company's capital structure; the lower the debt ratio, the higher the P/E
(d) current and projected rate of inflation; the lower the inflation, the higher the P/E
(e) level of dividends; the lower the dividend payout, the higher the P/E

P/E ratios could rise even as earnings fall if correct answers earnings fall at a faster rate than
stock prices.

Even if a company does not officially follow a fixed-dividend policy, dividend payments are
correct answers fairly stable from one time period to another.

Whisper numbers are correct answers generally higher than the released analysts' forecasts
(unofficial and unpublished EPS forecasts that circulate among wall street

The major forces behind earnings per share are correct answers return on equity and book value.
(EPS = ROE x BVPS)

Which one of the following is a correct equation to calculate earnings per share? correct answers
(profit margin)(total asset turnover)(equity multiplier)(book value per share)

Which one of the following is is most likely to increase the price of a stock? correct answers
rapid growth in earnings.

, The intrinsic value of a stock provides a purchase price for the stock correct answers that is
reasonable given the associated level of risk.

The risk free rate is 2%. The expected rate of return on the market is 12%. Beta and the expected
rate of return for four stocks are as follows.: ABC .8 , 10%; DEF 1, 12%; GHI 1.2 , 13%, and
JKL 2, 22%. Which of these stocks should not be purchased? correct answers GHI

Which of the following are key inputs to determining the value of an asset?
I. the required rate of return
II. future cash flows
III. current stock price
IV. timing of future cash flows correct answers I, II and IV only

Which of the following characteristics appeal to so-called value investors?
I. high P/E ratios.
II. low debt to equity ratios
III. high cash flow relative to price
IV. high book value relative to market price. correct answers II, III and IV only

An investor should purchase a stock when correct answers the expected rate of return equals or
exceeds the required return.

William is the type of stock market investor who focuses on factors such as a company's book
value, debt load, return on equity, and cash flow. In searching for stock investments, he looks at
a company's historical performance and attempts to find undervalued stocks. This information
indicates that Sam is the type of investor known as correct answers a value investor. (not in
textbook/notes)

Stephanie is an investor who believes that the real key to a company's future stock price lies in its
future earnings. When investing in a company, she carefully studies its future earnings potential,
and sells a company's stock at the first sign of any trouble. This information indicates that Della
would correctly be classified as correct answers a growth investor. (not in textbook/notes)

The subjective approach to determining a required rate of return for a stock includes
I. the rate of return on a long-term bond.
II. a risk premium for the perceived business risk of the asset.
III. a risk premium for assuming the risk of the market.
IV. the desired rate of return of the individual investor. correct answers I, II and III only

James is willing to settle for a 10% rate of return on EG stock at a time when investors, on
average, are requiring an 11% rate of return on the same stock. Which of the following will
happen? correct answers James will be happy to buy the stock for less than he was willing to
pay.

A company that wants to maintain both a constant growth rate in dividends and a constant payout
ratio will have to correct answers grow earnings at the same rate as dividends.

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