Practice Questions for Final Exam
1. If a firm issues no new equity, book value will _______________________.
A) decrease each year by the amount of retained earnings
B) decrease each year by the amount of retained earnings minus depreciation on fixed assets
C) increase each year by the amount of retained earnings
D) increase each year by the amount of retained earnings plus depreciation on fixed assets
2. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is __________.
3. Rose Hill Trading ...view middle of the document...
A) decrease its ROE
B) increase its ROE
C) not change its ROE
D) change its ROE in an indeterminable manner
8. You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A __________.
A) will be higher than the intrinsic value of stock B
B) will be the same as the intrinsic value of stock B
C) will be less than the intrinsic value of stock B
D) more information is necessary to answer this question
9. Grott and Perrin, Inc. has expected earnings of $3 per share for next year. The firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?
10. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be __________.
11. If a firm has a market-to-book-value ratio that is equivalent to the industry average and an ROE that is less than the industry average, it implies __________.
A) the firm has a higher P/E ratio than other firms in the industry
B) the firm is more likely to avoid insolvency in the short run than other firms in the industry
C) the firm is more profitable than other firms in the industry
D) the firm is utilizing its assets more efficiently than other firms in the industry
12. An underpriced stock provides an expected return which is _______________ the required return based on the capital asset pricing model (CAPM).
A) less than
B) equal to
C) greater than
D) greater than or equal to