CH 6

ch6
Student: ___________________________________________________________________________
1. The valuation of a company's stock based on a review of the firm's financial statements in conjunction
with other financial and economic data is called _____ analysis.
A. technical
B. conceptual
C. prediction
D. fundamental
E. discounted
2. The valuation of a stock based on the present value of the future income to be received from that stock is
referred to as the _____ model.
A. fundamental
B. constant
C. basic
D. compound dividend
E. dividend discount
3. A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growth
rate.
A. tangible
B. sustainable
C. retention
D. durable
E. proportional
4. The net profit of a firm which is held within the firm to support future growth is called _____ earnings.
A. capital
B. sustainable
C. tangible
D. retained
E. supportive
5. The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio.
A. payout
B. distribution
C. retention
D. capital
E. equity
6. The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio.
A. payout
B. distribution
C. retention
D. capital
E. equity
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7. The model used to value a stock which has a short-term growth rate that varies from its long-term
growth rate is called the _____ dividend growth model.
A. flexible
B. increasing
C. two-stage
D. stepped up
E. geometric
8. Beta is a measure of a stock's:
A. rate of return.
B. return relative to the overall market.
C. dividend growth rate.
D. dividend as a percentage of net income.
E. risk relative to the overall market.
9. The market value of a share of stock divided by the net income per share is called the _____ ratio.
A. growth-earnings
B. price-earnings
C. value-earnings
D. earnings profitability
E. market profitability
10. The net income per share divided by the market price per share is called the:
A. profit margin.
B. profit yield.
C. market yield.
D. earnings yield.
E. income ratio.
11. A method used to value the stock of a company which does not pay dividends is the _____ model.
A. net profit
B. internal cash flow
C. internal growth
D. reinvested growth
E. residual income
12. The accounting relationship where the change in book value per share is equal to earnings per share
minus dividends per share is called the _____ relationship.
A. clean surplus
B. retained earnings
C. payout
D. price-payout
E. price-retention
13. Stocks with high price-earnings ratios are commonly referred to as _____ stocks.
A. income
B. value
C. growth
D. geometric
E. low beta
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14. Value stocks are defined as stocks with:
A. low prices.
B. high dividends.
C. high growth rates.
D. low price-earnings ratios.
E. low market-book ratios.
15. The term cash flow, as it is used in the price-cash flow ratio, is generally defined as:
A. the total annual dividend amount.
B. net income minus dividends paid.
C. the total market value of the common stock.
D. net income plus depreciation.
E. net income plus depreciation minus dividends paid.
16. The market value per share of common stock divided by the firm's equity per share is called the _____
ratio.
A. market-equity
B. price-value
C. value-equity
D. price-book
E. book-value
17. Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on the
company. Which of the following will she most likely review during her analysis?
(I.) cost structure
(II.) cash flows
(III.) management quality
(IV.) earnings per share
A. I and II only
B. I and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
18. Based on the dividend discount model, the current value of a stock will _____ as the discount rate is
increased.
A. increase
B. either remain constant or increase
C. remain constant
D. either decrease or remain constant
E. decrease
19. The constant growth rate model assumes that:
A. the dividend payout ratio will remain constant.
B. the dividend growth rate is equal to the discount rate.
C. dividends will be paid for a stated number of years.
D. dividends will be paid in perpetuity.
E. the dividend payout ratio increases at a constant rate.
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20. The constant perpetual growth model assumes that:
A. dividends are paid for a stated number of years only.
B. a firm pays all of its net income out as dividends.
C. the growth rate is less than the discount rate.
D. dividends are constant in amount and will be paid forever.
E. the stock price is constant over time.
21. The constant perpetual growth model is applicable primarily to those firms which:
A. are relatively new and faster growing.
B. have relatively stable earnings and expect to increase the annual dividend for several years.
C. have recently commenced paying dividends and expect to increase the dividend significantly in the
short-term.
D. have growth rates that are less than 0.5 percent.
E. have a long history of constant dividends.
22. Which one of the following is a correct formula for computing a geometric average dividend growth
rate?
A. [(1 + D0) + (1 + D1) × (1 + DN)]N +1
N-1
-1
B. [(1 + D0) × (11+/ ND1) × (1 + DN)] -1
C. [D(N) / D(0)]N - 1
D. [D(N) / D(0)]N /-11
E. [D(N) / D(0)] -1
23. The arithmetic average dividend growth rate is:
A. the compounded rate of growth over a specified time period.
B. easier to compute than the geometric average dividend growth rate.
C. the summation of the annual dividend growth rates.
D. generally preferred by most financial analysts as compared to the geometric average growth rate.
E. the arithmetic average of the annual dividend growth rates.
24. The retention ratio is equal to:
A. net income divided by total equity.
B. the annual dividend amount divided by the net income.
C. net income divided by the number of shares outstanding.
D. 1 - dividend payout ratio.
E. 1 + dividend payout ratio.
25. An increase in the retention ratio will:
A. increase the dividends per share.
B. decrease the firm's rate of growth.
C. decrease the equity of a firm.
D. increase the dividend growth rate.
E. increase the value of the stock.
26. Which one of the following will increase the sustainable rate of growth?
A. decrease in net income
B. increase in the dividend payout ratio
C. increase in the total equity of the firm
D. increase in the retention ratio
E. decrease in earnings per share
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27. The sustainable growth rate is equal to:
A. ROE × (1 - Payout ratio).
B. ROA × (1 - Payout ratio).
C. ROE × (1 - Retention ratio).
D. ROA × (1 - Retention ratio).
E. ROE × Payout ratio.
28. Future Tech Products, Inc., expects to grow at 15 percent a year for the next five years and then taper off
to a constant 4 percent annual rate of growth. The firm has paid dividends for the past four years and
expects to continue doing so. Which one of the following models is best suited to computing the current
value of this firm's stock?
A. erratic dividend growth
B. constant perpetual growth
C. constant dividend growth
D. two-stage dividend growth
29. The two-stage dividend growth model assumes the second-stage growth rate is:
A. less than the discount rate.
B. less than or equal to the discount rate.
C. less than, greater than, or equal to the discount rate.
D. less than the first-stage growth rate.
E. greater than the first-stage growth rate.
30. Which one of the following statements concerning beta is correct?
A. The beta assigned to the overall market is zero.
B. A stock with a beta of 1.2 earns a lower risk premium than does the overall market.
C. A stock with a beta of .5 has 50 percent more risk than the overall market.
D. A stock with a beta of 1.1 has a risk premium that is greater than the market's risk premium.
E. The higher the beta, the lower the degree of risk.
31. Which one of the following is NOT a disadvantage related to the constant perpetual growth model?
A. requires firms to pay a dividend
B. sensitive to the dividend growth rate
C. growth rate must be less than the discount rate
D. simple to compute
E. discount rate difficult to predict
32. An increase in the dividend growth rate for a firm which is expected to pay dividends forever will _____
the price of that firm's stock.
A. increase
B. either increase or not affect
C. not affect
D. either decrease or not affect
E. decrease
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33. Which one of the following will increase the price-earnings ratio, all else constant?
(I.) a decrease in the number of shares outstanding
(II.) an increase in net income
(III.) a decrease in the earnings yield
(IV.) decrease in the market price per share
A. I only
B. III only
C. II and IV only
D. I and III only
E. I, III, and IV only
34. Which one of the following models can be used to value the stock of a non-dividend paying firm?
A. two-stage growth
B. residual income
C. dividend growth
D. supernormal growth
E. perpetual dividend growth
35. Which one of the following does NOT have the same meaning as the term "economic value added"?
A. abnormal earnings
B. residual income
C. value created by a firm in period t
D. EPSt - Bt-1 × k
E. excess of required earnings over actual earnings
36. Which one of the following statements is correct concerning the net income and cash flow of a firm?
A. The primary difference between the net income and the operating cash flow of a firm is taxes.
B. Analysts rely on the net income of a firm and therefore ignore the cash flows.
C. High quality earnings exist when the earnings per share is similar in value to the cash flow per share.
D. The net income of a firm is unaffected by the depreciation method selected.
E. The earnings per share will usually equal the net income per share for most firms.
37. The price-sales ratio helps measure the ability of a firm to generate:
A. net profits.
B. quality cash flows.
C. higher earnings per share.
D. higher cash flow per share.
E. revenue growth.
38. Thelma would like to know the value of a firm's equity today in relation to the cost of that equity. Which
one of the following ratios should Thelma consult to determine this information?
A. price-earnings
B. price-book
C. price-sales
D. price-cash flow
E. price-assets
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39. Which of the following items are included in a Value Line Investment Survey report?
(I.) recent stock price
(II.) target price range
(III.) recent quarterly earnings
(IV.) analyst's comments
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
40. The stock price is _____ the required return.
A. unaffected by
B. minimally affected by
C. independent of
D. dependent upon
E. directly correlated to
41. The stock price is _____ the dividend growth rate.
A. unaffected by
B. inversely related to
C. directly affected by
D. independent of
E. unrelated to
42. Michael's Enterprises plans to pay a $1.50 a share dividend at the end of each of the next three years.
Also, at the end of year 3, Michael's will pay a final liquidating dividend of $29 a share.After that, the
company will close its doors permanently. What is the current value of this stock if the appropriate
discount rate is 13 percent?
A. $21.22
B. $23.64
C. $25.14
D. $26.03
E. $29.65
43. Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share at the
end of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a share
liquidating dividend. After that, the company will cease operations. The discount rate on this stock is 14
percent. What is the current stock price per share?
A. $17.73
B. $19.09
C. $23.63
D. $27.74
E. $31.62
44. Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidation plan
calls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is the current
value of this stock given a discount rate of 13 percent?
A. $21.12
B. $23.33
C. $23.87
D. $25.16
E. $27.43
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45. Brentwood Industries announced today that they are going out of business. As of today, no more regular
dividends will be paid. The intention of the firm is to pay two liquidating dividends. The first dividend,
will be paid one year from now in the amount of $20 a share. The second and final dividend will be paid
two years from now at an estimated $13 a share. What is the value of this stock to you today if you feel
the appropriate discount rate is 16 percent?
A. $21.14
B. $24.52
C. $26.90
D. $28.45
E. $31.21
46. East River Entertainment plans to pay annual dividends for five more years. The last dividend paid was
$1.40 a share. Dividends are increased by 2 percent each year. What is the current value of this stock at a
discount rate of 9 percent?
A. $5.76
B. $6.09
C. $6.24
D. $6.70
E. $7.44
47. TL Tools has stated that they will continue paying annual dividends for 6 more years and then
discontinue all dividends. The required return on this stock is 11 percent and the dividend growth rate is
2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Tools stock?
A. $4.77
B. $5.81
C. $6.10
D. $6.82
E. $8.31
48. Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividend is
expected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividends after
3 more years as they are planning a major expansion project and will need to conserve cash. What is the
current value of this stock if the discount rate is 15 percent?
A. $3.22
B. $3.37
C. $3.41
D. $3.55
E. $3.59
49. Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividends
thereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. The
discount rate is 9 percent. What is the current value of this stock?
A. $1.91
B. $1.99
C. $2.04
D. $2.10
E. $2.40
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50. Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annual
dividend by 10 percent each year and will cease all dividends after 4 more payments. The next dividend
is expected to be $.90 a share. What is the current value of this stock at a discount rate of 15 percent?
A. $1.97
B. $2.13
C. $2.25
D. $2.34
E. $2.46
51. The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividends
forever and to increase the dividend by 2.5 percent annually. What is the current value of this stock if the
required return is 11 percent?
A. $19.09
B. $19.57
C. $24.70
D. $25.32
E. $25.95
52. Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The company has
a policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will pay
dividends for the foreseeable future. What is the current value of this stock at a discount rate of 14
percent?
A. $12.86
B. $13.24
C. $16.36
D. $16.85
E. $17.36
53. You own a firm which has relatively steady growth. As a result, you have adopted a policy of increasing
the annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. The discount rate is 10
percent. What is the present value of your stock?
A. $14.49
B. $15.00
C. $20.81
D. $21.54
E. $22.29
54. Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increases those
dividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is the required
return on this stock?
A. 12.02 percent
B. 12.50 percent
C. 12.67 percent
D. 12.82 percent
E. 13.00 percent
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55. Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase at a
constant rate. The last dividend paid was $1.24. The required return is 14 percent. What is the dividend
growth rate?
A. 2.38 percent
B. 2.44 percent
C. 2.50 percent
D. 2.56 percent
E. 2.60 percent
56. A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paid annually
and increase at a constant 3 percent each year. What is the amount of the last dividend paid?
A. $1.22
B. $1.28
C. $1.32
D. $1.36
E. $1.40
57. Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. The stock
is currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300 shares of
this stock. What is the total amount of dividend income you should expect to receive next year?
A. $707
B. $732
C. $741
D. $758
E. $770
58. The common stock of Lester's Office Supply has a required return of 12 percent and a current value of
$14.79. The company pays its dividend annually and increases the amount by 2 percent each year. You
own 600 shares of this stock. What was the total amount of the last dividend you received?
A. $853
B. $859
C. $864
D. $870
E. $887
59. Sam's Furniture has paid annual dividends of $1.60, $1.72, $1.78, $1.84, and $1.90 over the last 5 years,
respectively. What is the geometric average dividend growth rate?
A. 3.75 percent
B. 4.01 percent
C. 4.39 percent
D. 4.55 percent
E. 4.69 percent
60. Your firm has paid annual dividends of $1.20, $1.34, $1.35, $1.40, $1.44, and $1.50 per share over the
past 6 years, respectively. What is the geometric average growth rate for these dividends?
A. 3.89 percent
B. 4.13 percent
C. 4.14 percent
D. 4.56 percent
E. 5.00 percent
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61. Over the past 5 years, Wilson's Lumber has paid annual dividends of $1.60, $1.66, $1.70, $1.75, and
$1.80 per share. What is the geometric average dividend growth rate for this period?
A. 2.99 percent
B. 3.13 percent
C. 3.18 percent
D. 3.27 percent
E. 3.33 percent
62. Patty's Pools has paid annual dividends of $1.40, $1.55, $1.60, $1.70, and $1.75 per share over the past 5
years, respectively. What is the geometric average dividend growth rate for this period?
A. 4.75 percent
B. 4.93 percent
C. 5.00 percent
D. 5.49 percent
E. 5.74 percent
63. Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paid dividends
of $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometric average dividend
growth rate for this time period?
A. 3.01 percent
B. 3.07 percent
C. 3.39 percent
D. 3.44 percent
E. 3.68 percent
64. Over the past 4 years, your firm has paid annual dividends of $1.90, $2.10, $2.20, and $2.35. What is the
arithmetic average dividend growth rate?
A. 7.30 percent
B. 7.34 percent
C. 7.37 percent
D. 8.01 percent
E. 8.05 percent
65. Lester's Farms has paid annual dividends of $1.50, $1.75, $1.77, $1.87, and $2.00 over the past 5 years,
respectively. What is the arithmetic average growth rate for these dividends?
A. 7.37 percent
B. 7.40 percent
C. 7.46 percent
D. 7.54 percent
E. 7.60 percent
66. Bernice's Yarn Shop started paying dividends 4 years ago. The annual dividends were $.50, $.57, $.60,
and $.63, respectively. What is the arithmetic average dividend growth rate?
A. 7.97 percent
B. 8.01 percent
C. 8.04 percent
D. 8.09 percent
E. 8.13 percent
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67. J&L Pools has net income of $248,000. The firm has 500,000 shares of common stock outstanding. The
dividend that is being paid for this year is $.1984 per share. What is the retention ratio?
A. .50
B. .55
C. .60
D. .65
E. .70
68. Down River Stores has a dividend payout ratio of 30 percent and annual dividends of $1.80 per share.
What is the retention ratio?
A. .54
B. .55
C. .67
D. .70
E. .77
69. Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that income out
to the shareholders. What is the firm's retention ratio?
A. .40
B. .42
C. .45
D. .47
E. .50
70. Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 in
liabilities. What is the return on equity?
A. 5.62 percent
B. 7.87 percent
C. 12.40 percent
D. 16.86 percent
E. 21.45 percent
71. Dead Wood Planners has earnings per share of $1.36. The firm has $980,000 in equity and 125,000
shares of stock outstanding. What is the return on equity?
A. 14.92 percent
B. 16.08 percent
C. 17.35 percent
D. 18.47 percent
E. 19.36 percent
72. The West Wind Company has earnings per share of $2.20 and dividends per share of $1.21. The total
equity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainable rate
of growth?
A. 7.14 percent
B. 7.31 percent
C. 7.90 percent
D. 8.44 percent
E. 8.73 percent
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73. Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per share
and a book value of $17.27 a share. The firm has earnings per share of $2.44, a dividend payout ratio of
.35, and a P/E ratio of 12. What is the firm's sustainable rate of growth?
A. 8.88 percent
B. 9.18 percent
C. 11.11 percent
D. 12.57 percent
E. 14.13 percent
74. Donaldson and Heirs has a net income of $238,000, total assets of $1,784,000, and total liabilities of
$437,000. The company paid $66,640 in dividends. What is the firm's sustainable rate of growth?
A. 3.74 percent
B. 4.95 percent
C. 9.61 percent
D. 11.93 percent
E. 12.72 percent
75. John Wilde Industries has a retention ratio of .75, dividends of $46,000, and total equity of $2.9 million.
What is the firm's sustainable rate of growth?
A. 1.19 percent
B. 2.73 percent
C. 4.76 percent
D. 5.38 percent
E. 6.34 percent
76. Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend will
increase by 15 percent a year for the next three years. After that, the dividend growth rate is estimated at
3.5 percent. The required rate of return is 12 percent. What is the value of this stock today?
A. $6.54
B. $7.03
C. $7.78
D. $8.03
E. $8.54
77. The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest press release
stated that last year's dividend was $1.20 per share and that future dividends will increase by 10 percent
for the following 3 years. After that, the dividend growth rate will be 2.5 percent indefinitely. What is
one share of this stock worth to you today?
A. $13.42
B. $14.14
C. $15.26
D. $15.74
E. $16.03
78. Hill's Country Fresh Eggs is a relatively young firm which just paid their first annual dividend of $.40 a
share. Management projects dividend increases of 15 percent per year for five years followed by a
constant growth rate of 3 percent annually. What is this stock worth today if the applicable discount rate
is 11 percent?
A. $8.37
B. $9.08
C. $9.42
D. $11.76
E. $12.45
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79. The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends for
the following 4 years will be increased at an annual rate of 12 percent. After that, dividends are expected
to increase by 2 percent each year. The discount rate is 14 percent. What is the current value of this
stock?
A. $10.40
B. $12.78
C. $13.33
D. $14.10
E. $15.55
80. Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure clothing
store. In conjunction with this reorganization, the dividend will be decreased by 20 percent in each of the
next 2 years. After that, the dividend will resume its historical pattern of 3 percent annual increases. The
required return on this stock is 10 percent and the last dividend paid was $3 a share. What is one share of
this stock worth today?
A. $25.08
B. $27.12
C. $28.16
D. $28.68
E. $29.72
81. Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8
percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this stock
worth today if the required return is 9 percent?
A. $14.52
B. $15.06
C. $15.30
D. $16.97
E. $17.08
82. Wilson's Leather Goods has net income of $41,600 and total equity of $381,000. The firm was 60,000
shares of stock outstanding at a price per share of $14.20. What is the firm's P/E ratio?
A. 16.21
B. 17.37
C. 19.09
D. 20.48
E. 21.94
83. Jedstone Home Decors has net income of $26,000, total assets of $143,000, total liabilities of $54,000,
and a price-book ratio of 4.3. There are 50,000 shares of stock outstanding. What is the firm's
price-earnings ratio?
A. 14.72
B. 15.11
C. 16.48
D. 17.65
E. 19.46
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84. Magnolia Farms has 125,000 shares of stock outstanding, sales of $1.2 million, and net income of
$152,000. Financial analysts have stated that the price-earnings ratio for this firm should be 15.5. Given
this information, what should be the current stock price?
A. $12.75
B. $15.68
C. $18.85
D. $19.19
E. $22.07
85. Ameth Growers has historically had a P/E ratio of 21.4. This ratio is considered a good estimate of the
future ratio. The firm currently has EPS of $2.34. These earnings are expected to increase by 3.4 percent
next year. What is the expected price of this stock one year from now?
A. $45.54
B. $48.43
C. $50.25
D. $51.78
E. $53.79
86. Historically, JT Enterprises has a P/E ratio of 18.4. The firm has current net income of $83,500 with
150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected price of
this stock one year from now?
A. $11.53
B. $13.14
C. $13.82
D. $15.38
E. $15.62
87. Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and the projected
CFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of this stock one
year from now?
A. $34.79
B. $36.38
C. $37.91
D. $39.27
E. $40.42
88. Mark's Men's Wear has current SPS of $6.18. SPS are expected to increase at an annual rate of 9 percent.
The historical P/E ratio is 12.1 and the historical P/S ratio is 7.08. What is the expected price of this
stock one year from now?
A. $39.33
B. $42.91
C. $47.69
D. $50.04
E. $52.68
89. Southern Growers has current EPS of $1.42 and a projected EPS growth rate of 14 percent. Historically,
the company's P/E ratio has been 24.8 with SPS of $7.20. What is the expected price of this stock one
year from now?
A. $30.89
B. $40.15
C. $48.62
D. $51.18
E. $62.09
15
90. Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400
thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5 percent
annually. The historical P/S ratio is 8.5. What is the expected price of this stock one year from now?
A. $72.25
B. $73.14
C. $75.55
D. $77.01
E. $77.67
91. The current book value per share of Trenton Motors is $11.90 and the required return on the stock is 15
percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4
percent. What is the current value of this stock?
A. $8.40
B. $8.91
C. $16.07
D. $18.18
E. $20.30
92. Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5
percent. The required return on the stock is 11 percent and the current book value per share is $12.95.
What is the current value of this stock?
A. $29.07
B. $34.11
C. $36.05
D. $42.31
E. $49.00
93. Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. The required
return on Amore stock is 16 percent and the expected earnings growth rate is 7 percent. What is one
share of this stock worth today?
A. $8.18
B. $9.15
C. $9.56
D. $10.02
E. $10.58
16
ch6 Key
1. The valuation of a company's stock based on a review of the firm's financial statements in
conjunction with other financial and economic data is called _____ analysis.
A. technical
B. conceptual
C. prediction
D. fundamental
E. discounted
Jordan - Chapter 06 #1
Topic: FUNDAMENTAL ANALYSIS
Type: DEFINITIONS
2. The valuation of a stock based on the present value of the future income to be received from that
stock is referred to as the _____ model.
A. fundamental
B. constant
C. basic
D. compound dividend
Topic: DIVIDEND DISCOUNT MODEL
Type: DEFINITIONS
3. A dividend growth rate that can be supported by the firm's earnings is referred to as a _____ growth
rate.
A. tangible
B. sustainable
C. retention
D. durable
E. proportional
Topic: SUSTAINABLE GROWTH RATE
Type: DEFINITIONS
4. The net profit of a firm which is held within the firm to support future growth is called _____
earnings.
A. capital
B. sustainable
C. tangible
D. retained
E. supportive
Topic: RETAINED EARNINGS
Type: DEFINITIONS
1
5. The percentage of a firm's net income which is distributed to shareholders is called the _____ ratio.
A. payout
B. distribution
C. retention
D. capital
E. equity
Topic: PAYOUT RATIO
Type: DEFINITIONS
6. The percentage of a firm's net income which is reinvested in the firm is called the _____ ratio.
A. payout
B. distribution
C. retention
D. capital
E. equity
Topic: RETENTION RATIO
Type: DEFINITIONS
7. The model used to value a stock which has a short-term growth rate that varies from its long-term
growth rate is called the _____ dividend growth model.
A. flexible
B. increasing
C. two-stage
D. stepped up
E. geometric
Topic: TWO-STAGE DIVIDEND GROWTH MODEL
Type: DEFINITIONS
8. Beta is a measure of a stock's:

A. rate of return.
B. return relative to the overall market.
C. dividend growth rate.
D. dividend as a percentage of net income.
E. risk relative to the overall market.
Topic: BETA
Type: DEFINITIONS
9. The market value of a share of stock divided by the net income per share is called the _____ ratio.
A. growth-earnings
B. price-earnings
C. value-earnings
D. earnings profitability
E. market profitability
Topic: PRICE-EARNINGS RATIO
Type: DEFINITIONS
2
10. The net income per share divided by the market price per share is called the:
A. profit margin.
B. profit yield.
C. market yield.
D. earnings yield.
E. income ratio.
Topic: EARNINGS YIELD
Type: DEFINITIONS
11. A method used to value the stock of a company which does not pay dividends is the _____ model.
A. net profit
B. internal cash flow
C. internal growth
D. reinvested growth
E. residual income
Topic: RESIDUAL INCOME MODEL
Type: DEFINITIONS
12. The accounting relationship where the change in book value per share is equal to earnings per share
minus dividends per share is called the _____ relationship.
A. clean surplus
B. retained earnings
C. payout
D. price-payout
E. price-retention
Topic: CLEAN SURPLUS RELATIONSHIP
Type: DEFINITIONS
13. Stocks with high price-earnings ratios are commonly referred to as _____ stocks.
A. income
B. value
C. growth
D. geometric
E. low beta
Topic: GROWTH STOCKS
Type: DEFINITIONS
14. Value stocks are defined as stocks with:

A. low prices.
B. high dividends.
C. high growth rates.
D. low price-earnings ratios.
E. low market-book ratios.
Topic: VALUE STOCKS
Type: DEFINITIONS
3
15. The term cash flow, as it is used in the price-cash flow ratio, is generally defined as:
A. the total annual dividend amount.
B. net income minus dividends paid.
C. the total market value of the common stock.
D. net income plus depreciation.
E. net income plus depreciation minus dividends paid.
Topic: CASH FLOW
Type: DEFINITIONS
16. The market value per share of common stock divided by the firm's equity per share is called the
_____ ratio.
A. market-equity
B. price-value
C. value-equity
D. price-book
E. book-value
Topic: PRICE-BOOK RATIO
Type: DEFINITIONS
17. Maria wishes to purchase a stock and has decided to conduct some fundamental analysis on the
company. Which of the following will she most likely review during her analysis?
(I.) cost structure
(II.) cash flows
(III.) management quality
(IV.) earnings per share
A. I and II only
B. I and IV only
C. II, III, and IV only
D. I, II, and IV only
Topic: FUNDAMENTAL ANALYSIS
Type: CONCEPTS
18. Based on the dividend discount model, the current value of a stock will _____ as the discount rate is
increased.
A. increase
B. either remain constant or increase
C. remain constant
D. either decrease or remain constant
E. decrease
Topic: DIVIDEND DISCOUNT MODEL
Type: CONCEPTS
19. The constant growth rate model assumes that:

A. the dividend payout ratio will remain constant.
B. the dividend growth rate is equal to the discount rate.
C. dividends will be paid for a stated number of years.
D. dividends will be paid in perpetuity.
E. the dividend payout ratio increases at a constant rate.
Topic: CONSTANT GROWTH RATE MODEL
Type: CONCEPTS
4
20. The constant perpetual growth model assumes that:
A. dividends are paid for a stated number of years only.
B. a firm pays all of its net income out as dividends.
C. the growth rate is less than the discount rate.
D. dividends are constant in amount and will be paid forever.
E. the stock price is constant over time.
Topic: CONSTANT PERPETUAL GROWTH MODEL
Type: CONCEPTS
21. The constant perpetual growth model is applicable primarily to those firms which:
A. are relatively new and faster growing.
B. have relatively stable earnings and expect to increase the annual dividend for several years.
C. have recently commenced paying dividends and expect to increase the dividend significantly in
the short-term.
D. have growth rates that are less than 0.5 percent.
E. have a long history of constant dividends.
Type: CONCEPTS
22. Which one of the following is a correct formula for computing a geometric average dividend growth
rate?
A. [(1 + D0) + (1 + D1) × (1 + DN)]N +1
N-1
-1
B. [(1 + D0) × (11+/ ND1) × (1 + DN)] -1
C. [D(N) / D(0)]N - 1
D. [D(N) / D(0)]N /- 11
E. [D(N) / D(0)] -1
Topic: GEOMETRIC AVERAGE GROWTH RATE
Type: CONCEPTS
23. The arithmetic average dividend growth rate is:

A. the compounded rate of growth over a specified time period.
B. easier to compute than the geometric average dividend growth rate.
C. the summation of the annual dividend growth rates.
D. generally preferred by most financial analysts as compared to the geometric average growth rate.
E. the arithmetic average of the annual dividend growth rates.
Topic: ARITHMETIC AVERAGE GROWTH RATE
Type: CONCEPTS
24. The retention ratio is equal to:

A. net income divided by total equity.
B. the annual dividend amount divided by the net income.
C. net income divided by the number of shares outstanding.
D. 1 - dividend payout ratio.
E. 1 + dividend payout ratio.
Type: CONCEPTS
5
25. An increase in the retention ratio will:
A. increase the dividends per share.
B. decrease the firm's rate of growth.
C. decrease the equity of a firm.
D. increase the dividend growth rate.
E. increase the value of the stock.
Type: CONCEPTS
26. Which one of the following will increase the sustainable rate of growth?
A. decrease in net income
B. increase in the dividend payout ratio
C. increase in the total equity of the firm
D. increase in the retention ratio
E. decrease in earnings per share
Type: CONCEPTS
27. The sustainable growth rate is equal to:

A. ROE × (1 - Payout ratio).
B. ROA × (1 - Payout ratio).
C. ROE × (1 - Retention ratio).
D. ROA × (1 - Retention ratio).
E. ROE × Payout ratio.
Type: CONCEPTS
28. Future Tech Products, Inc., expects to grow at 15 percent a year for the next five years and then taper
off to a constant 4 percent annual rate of growth. The firm has paid dividends for the past four years
and expects to continue doing so. Which one of the following models is best suited to computing the
current value of this firm's stock?
A. erratic dividend growth
B. constant perpetual growth
C. constant dividend growth
D. two-stage dividend growth
Type: CONCEPTS
29. The two-stage dividend growth model assumes the second-stage growth rate is:
A. less than the discount rate.
B. less than or equal to the discount rate.
C. less than, greater than, or equal to the discount rate.
D. less than the first-stage growth rate.
E. greater than the first-stage growth rate.
Type: CONCEPTS
6
30. Which one of the following statements concerning beta is correct?
A. The beta assigned to the overall market is zero.
B. A stock with a beta of 1.2 earns a lower risk premium than does the overall market.
C. A stock with a beta of .5 has 50 percent more risk than the overall market.
D. A stock with a beta of 1.1 has a risk premium that is greater than the market's risk premium.
E. The higher the beta, the lower the degree of risk.
Topic: BETA
Type: CONCEPTS
31. Which one of the following is NOT a disadvantage related to the constant perpetual growth model?
A. requires firms to pay a dividend
B. sensitive to the dividend growth rate
C. growth rate must be less than the discount rate
D. simple to compute
E. discount rate difficult to predict
Topic: CONSTANT PERPETUAL GROWTH
Type: CONCEPTS
32. An increase in the dividend growth rate for a firm which is expected to pay dividends forever will
_____ the price of that firm's stock.
A. increase
B. either increase or not affect
C. not affect
D. either decrease or not affect
E. decrease
Topic: CONSTANT PERPETUAL GROWTH
Type: CONCEPTS
33. Which one of the following will increase the price-earnings ratio, all else constant?
(I.) a decrease in the number of shares outstanding
(II.) an increase in net income
(III.) a decrease in the earnings yield
(IV.) decrease in the market price per share
A. I only
B. III only
C. II and IV only
D. I and III only
E. I, III, and IV only
Type: CONCEPTS
34. Which one of the following models can be used to value the stock of a non-dividend paying firm?
A. two-stage growth
B. residual income
C. dividend growth
D. supernormal growth
E. perpetual dividend growth
Type: CONCEPTS
7
35. Which one of the following does NOT have the same meaning as the term "economic value added"?
A. abnormal earnings
B. residual income
C. value created by a firm in period t
D. EPSt - Bt-1 × k
E. excess of required earnings over actual earnings
Topic: ECONOMIC VALUE ADDED
Type: CONCEPTS
36. Which one of the following statements is correct concerning the net income and cash flow of a
firm?
A. The primary difference between the net income and the operating cash flow of a firm is taxes.
B. Analysts rely on the net income of a firm and therefore ignore the cash flows.
C. High quality earnings exist when the earnings per share is similar in value to the cash flow per
share.
D. The net income of a firm is unaffected by the depreciation method selected.
E. The earnings per share will usually equal the net income per share for most firms.
Topic: NET INCOME AND CASH FLOW
Type: CONCEPTS
37. The price-sales ratio helps measure the ability of a firm to generate:
A. net profits.
B. quality cash flows.
C. higher earnings per share.
D. higher cash flow per share.
E. revenue growth.
Topic: PRICE-SALES RATIO
Type: CONCEPTS
38. Thelma would like to know the value of a firm's equity today in relation to the cost of that equity.
Which one of the following ratios should Thelma consult to determine this information?
A. price-earnings
B. price-book
C. price-sales
D. price-cash flow
E. price-assets
Topic: PRICE-BOOK RATIO
Type: CONCEPTS
39. Which of the following items are included in a Value Line Investment Survey report?
(I.) recent stock price
(II.) target price range
(III.) recent quarterly earnings
(IV.) analyst's comments
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
Topic: VALUE LINE
Type: CONCEPTS
8
40. The stock price is _____ the required return.
A. unaffected by
B. minimally affected by
C. independent of
D. dependent upon
E. directly correlated to
Topic: PRICE AND REQUIRED RETURN
Type: CONCEPTS
41. The stock price is _____ the dividend growth rate.

A. unaffected by
B. inversely related to
C. directly affected by
D. independent of
E. unrelated to
Topic: PRICE AND DIVIDEND GROWTH RATE
Type: CONCEPTS
42. Michael's Enterprises plans to pay a $1.50 a share dividend at the end of each of the next three years.
Also, at the end of year 3, Michael's will pay a final liquidating dividend of $29 a share.After that, the
company will close its doors permanently. What is the current value of this stock if the appropriate
A. $21.22
B. $23.64
C. $25.14
D. $26.03
E. $29.65
Topic: LIQUIDATING DIVIDEND VALUATION
Type: PROBLEMS
43. Windover Machines, Inc., just announced that they will pay an annual dividend of $2.50 a share at
the end of each of the next 2 years. At the end of year 3, the company expects to pay a $35 a share
liquidating dividend. After that, the company will cease operations. The discount rate on this stock is
14 percent. What is the current stock price per share?
A. $17.73
B. $19.09
C. $23.63
D. $27.74
E. $31.62
Type: PROBLEMS
9
44. Aloe, Inc., is downsizing and plans on completely closing 4 years from now. The firm's liquidation
plan calls for annual dividends of $5, $3, $3, and $20 over the next 4 years, respectively. What is the
current value of this stock given a discount rate of 13 percent?
A. $21.12
B. $23.33
C. $23.87
D. $25.16
E. $27.43
Type: PROBLEMS
45. Brentwood Industries announced today that they are going out of business. As of today, no more
regular dividends will be paid. The intention of the firm is to pay two liquidating dividends. The first
dividend, will be paid one year from now in the amount of $20 a share. The second and final
dividend will be paid two years from now at an estimated $13 a share. What is the value of this stock
to you today if you feel the appropriate discount rate is 16 percent?
A. $21.14
B. $24.52
C. $26.90
D. $28.45
E. $31.21
Type: PROBLEMS
46. East River Entertainment plans to pay annual dividends for five more years. The last dividend paid
was $1.40 a share. Dividends are increased by 2 percent each year. What is the current value of this
stock at a discount rate of 9 percent?
A. $5.76
B. $6.09
C. $6.24
D. $6.70
E. $7.44
Topic: CONSTANT DIVIDEND GROWTH RATE MODEL
47. TL Tools has stated that they will continue paying annual dividends for 6 more years and then
discontinue all dividends. The required return on this stock is 11 percent and the dividend growth rate
is 2.5 percent. The next dividend is expected to be $1.30. What is the current value of TL Tools
stock?
A. $4.77
B. $5.81
C. $6.10
D. $6.82
E. $8.31
Type: PROBLEMS
10
48. Blackwater Tours pays an annual dividend which increases by 4 percent each year. The next dividend
is expected to be $1.36 a share. Blackwater recently announced that they will be ceasing all dividends
after 3 more years as they are planning a major expansion project and will need to conserve cash.
What is the current value of this stock if the discount rate is 15 percent?
A. $3.22
B. $3.37
C. $3.41
D. $3.55
E. $3.59
Type: PROBLEMS
49. Hand-Krafted Furniture plans to pay 3 more annual dividends and then discontinue all dividends
thereafter. The last dividend paid was $.80 a share and dividends increase by 2 percent annually. The
discount rate is 9 percent. What is the current value of this stock?
A. $1.91
B. $1.99
C. $2.04
D. $2.10
E. $2.40
Type: PROBLEMS
50. Allegheny Woods is slowly losing its market share. As a result, the company is decreasing its annual
dividend by 10 percent each year and will cease all dividends after 4 more payments. The next
dividend is expected to be $.90 a share. What is the current value of this stock at a discount rate of 15
percent?
A. $1.97
B. $2.13
C. $2.25
D. $2.34
E. $2.46
Type: PROBLEMS
51. The Whirlwind Co. just paid an annual dividend of $2.10 a share. The firm expects to pay dividends
forever and to increase the dividend by 2.5 percent annually. What is the current value of this stock if
the required return is 11 percent?
A. $19.09
B. $19.57
C. $24.70
D. $25.32
E. $25.95
Type: PROBLEMS
11
52. Catch Up, Inc., is planning on paying an annual dividend of $1.80 per share next year. The company
has a policy of increasing the dividend by 3 percent annually. As far as they know, Catch Up will pay
dividends for the foreseeable future. What is the current value of this stock at a discount rate of 14
percent?
A. $12.86
B. $13.24
C. $16.36
D. $16.85
E. $17.36
Type: PROBLEMS
53. You own a firm which has relatively steady growth. As a result, you have adopted a policy of
increasing the annual dividend by 3.5 percent each year. Next year's dividend will be $1.40. The
discount rate is 10 percent. What is the present value of your stock?
A. $14.49
B. $15.00
C. $20.81
D. $21.54
E. $22.29
Type: PROBLEMS
54. Margo Enterprises stock is valued at $17.65 a share. The firm pays annual dividends and increases
those dividends by 4 percent each year. Next year's dividend will be $1.50 per share. What is the
required return on this stock?
A. 12.02 percent
B. 12.50 percent
C. 12.67 percent
D. 12.82 percent
E. 13.00 percent
Type: PROBLEMS
55. Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase at
a constant rate. The last dividend paid was $1.24. The required return is 14 percent. What is the
dividend growth rate?
A. 2.38 percent
B. 2.44 percent
C. 2.50 percent
D. 2.56 percent
E. 2.60 percent
Type: PROBLEMS
12
56. A stock sells for $12.95 a share and has a required return of 13.5 percent. Dividends are paid
annually and increase at a constant 3 percent each year. What is the amount of the last dividend
paid?
A. $1.22
B. $1.28
C. $1.32
D. $1.36
E. $1.40
Type: PROBLEMS
57. Penny's Shoes pays annual dividends and increases those dividends by 3.5 percent each year. The
stock is currently valued at $24.40 a share and has a required return of 13.5 percent. You own 300
shares of this stock. What is the total amount of dividend income you should expect to receive next
year?
A. $707
B. $732
C. $741
D. $758
E. $770
Type: PROBLEMS
58. The common stock of Lester's Office Supply has a required return of 12 percent and a current value
of $14.79. The company pays its dividend annually and increases the amount by 2 percent each year.
You own 600 shares of this stock. What was the total amount of the last dividend you received?
A. $853
B. $859
C. $864
D. $870
E. $887
Type: PROBLEMS
59. Sam's Furniture has paid annual dividends of $1.60, $1.72, $1.78, $1.84, and $1.90 over the last 5
years, respectively. What is the geometric average dividend growth rate?
A. 3.75 percent
B. 4.01 percent
C. 4.39 percent
D. 4.55 percent
E. 4.69 percent
Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE
Type: PROBLEMS
13
60. Your firm has paid annual dividends of $1.20, $1.34, $1.35, $1.40, $1.44, and $1.50 per share over
the past 6 years, respectively. What is the geometric average growth rate for these dividends?
A. 3.89 percent
B. 4.13 percent
C. 4.14 percent
D. 4.56 percent
E. 5.00 percent
Type: PROBLEMS
61. Over the past 5 years, Wilson's Lumber has paid annual dividends of $1.60, $1.66, $1.70, $1.75, and
$1.80 per share. What is the geometric average dividend growth rate for this period?
A. 2.99 percent
B. 3.13 percent
C. 3.18 percent
D. 3.27 percent
E. 3.33 percent
Type: PROBLEMS
62. Patty's Pools has paid annual dividends of $1.40, $1.55, $1.60, $1.70, and $1.75 per share over the
past 5 years, respectively. What is the geometric average dividend growth rate for this period?
A. 4.75 percent
B. 4.93 percent
C. 5.00 percent
D. 5.49 percent
E. 5.74 percent
Type: PROBLEMS
63. Arthur's Manufactured Homes pays annual dividends. For the past six years, the firm has paid
dividends of $1.90, $1.95, $2.10, $2.15, $2.20, and $2.25, respectively. What is the geometric
average dividend growth rate for this time period?
A. 3.01 percent
B. 3.07 percent
C. 3.39 percent
D. 3.44 percent
E. 3.68 percent
Type: PROBLEMS
14
64. Over the past 4 years, your firm has paid annual dividends of $1.90, $2.10, $2.20, and $2.35. What is
the arithmetic average dividend growth rate?
A. 7.30 percent
B. 7.34 percent
C. 7.37 percent
D. 8.01 percent
E. 8.05 percent
Annual growth rate year 1 to 2: ($2.10 - $1.90) / $1.90 = .105263

Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE
Type: PROBLEMS
65. Lester's Farms has paid annual dividends of $1.50, $1.75, $1.77, $1.87, and $2.00 over the past 5
years, respectively. What is the arithmetic average growth rate for these dividends?
A. 7.37 percent
B. 7.40 percent
C. 7.46 percent
D. 7.54 percent
E. 7.60 percent
Annual growth rate year 1 to 2: ($1.75 - $1.50) / $1.50 = .166667

Type: PROBLEMS
66. Bernice's Yarn Shop started paying dividends 4 years ago. The annual dividends were $.50, $.57,
$.60, and $.63, respectively. What is the arithmetic average dividend growth rate?
A. 7.97 percent
B. 8.01 percent
C. 8.04 percent
D. 8.09 percent
E. 8.13 percent
Annual growth rate year 1 to 2: ($.57 - $.50) / $.50 = .14000

Type: PROBLEMS
67. J&L Pools has net income of $248,000. The firm has 500,000 shares of common stock outstanding.
The dividend that is being paid for this year is $.1984 per share. What is the retention ratio?
A. .50
B. .55
C. .60
D. .65
E. .70
Type: PROBLEMS
15
68. Down River Stores has a dividend payout ratio of 30 percent and annual dividends of $1.80 per share.
What is the retention ratio?
A. .54
B. .55
C. .67
D. .70
E. .77
Retention ratio = 1 - .30 = .70

Type: PROBLEMS
69. Modern Designs has net income of $310,000. The firm has decided to pay $180,000 of that income
out to the shareholders. What is the firm's retention ratio?
A. .40
B. .42
C. .45
D. .47
E. .50
Retention ratio = ($310,000 - $180,000) / $310,000 = .419 = .42

Type: PROBLEMS
70. Plastic Toys, Inc., has a net income of $236,000. The firm has $1.4 million in assets and $300,000 in
liabilities. What is the return on equity?
A. 5.62 percent
B. 7.87 percent
C. 12.40 percent
D. 16.86 percent
E. 21.45 percent
Return on equity = $236,000 / ($1,400,000 - $300,000) = .214545 = 21.45 percent

Topic: RETURN ON EQUITY
Type: PROBLEMS
16
71. Dead Wood Planners has earnings per share of $1.36. The firm has $980,000 in equity and 125,000
shares of stock outstanding. What is the return on equity?
A. 14.92 percent
B. 16.08 percent
C. 17.35 percent
D. 18.47 percent
E. 19.36 percent
Return on equity = ($1.36 × 125,000) / $980,000 = .17347 = 17.35 percent

Topic: RETURN ON EQUITY
Type: PROBLEMS
72. The West Wind Company has earnings per share of $2.20 and dividends per share of $1.21. The total
equity of the firm is $970,000. There are 70,000 shares of stock outstanding. What is the sustainable
rate of growth?
A. 7.14 percent
B. 7.31 percent
C. 7.90 percent
D. 8.44 percent
E. 8.73 percent
Sustainable growth rate = [($2.20 × 70,000) / $970,000] × (1 - ($1.21 / $2.20) = .158763 × .45 =
.07144 = 7.14 percent

Type: PROBLEMS
73. Naples Vacation Rentals has 60,000 shares of stock outstanding at a market price of $29.28 per share
and a book value of $17.27 a share. The firm has earnings per share of $2.44, a dividend payout ratio
of .35, and a P/E ratio of 12. What is the firm's sustainable rate of growth?
A. 8.88 percent
B. 9.18 percent
C. 11.11 percent
D. 12.57 percent
E. 14.13 percent
Sustainable growth rate = [(60,000 × $2.44) / (60,000 × $17.27)] × (1 - .35) = [$146,400 /

$1,036,200] × .65 = .09184 = 9.18 percent

Type: PROBLEMS
17
74. Donaldson and Heirs has a net income of $238,000, total assets of $1,784,000, and total liabilities of
$437,000. The company paid $66,640 in dividends. What is the firm's sustainable rate of growth?
A. 3.74 percent
B. 4.95 percent
C. 9.61 percent
D. 11.93 percent
E. 12.72 percent
Type: PROBLEMS
75. John Wilde Industries has a retention ratio of .75, dividends of $46,000, and total equity of $2.9
million. What is the firm's sustainable rate of growth?
A. 1.19 percent
B. 2.73 percent
C. 4.76 percent
D. 5.38 percent
E. 6.34 percent
Sustainable growth rate = {[($46,000 / (1 - .75)] / $2,900,000} × .75 = .047586 = 4.76 percent

Type: PROBLEMS
76. Dover Mills just paid an annual dividend of $.40 a share. Management estimates the dividend will
increase by 15 percent a year for the next three years. After that, the dividend growth rate is estimated
at 3.5 percent. The required rate of return is 12 percent. What is the value of this stock today?
A. $6.54
B. $7.03
C. $7.78
D. $8.03
E. $8.54
Type: PROBLEMS
77. The common stock of Red Rover Feed Mills has a required return of 12 percent. The latest press
release stated that last year's dividend was $1.20 per share and that future dividends will increase by
10 percent for the following 3 years. After that, the dividend growth rate will be 2.5 percent
indefinitely. What is one share of this stock worth to you today?
A. $13.42
B. $14.14
C. $15.26
D. $15.74
E. $16.03
Type: PROBLEMS
18
78. Hill's Country Fresh Eggs is a relatively young firm which just paid their first annual dividend of
$.40 a share. Management projects dividend increases of 15 percent per year for five years followed
by a constant growth rate of 3 percent annually. What is this stock worth today if the applicable
A. $8.37
B. $9.08
C. $9.42
D. $11.76
E. $12.45
Type: PROBLEMS
79. The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends
for the following 4 years will be increased at an annual rate of 12 percent. After that, dividends are
expected to increase by 2 percent each year. The discount rate is 14 percent. What is the current value
of this stock?
A. $10.40
B. $12.78
C. $13.33
D. $14.10
E. $15.55
Type: PROBLEMS
80. Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure
clothing store. In conjunction with this reorganization, the dividend will be decreased by 20 percent
in each of the next 2 years. After that, the dividend will resume its historical pattern of 3 percent
annual increases. The required return on this stock is 10 percent and the last dividend paid was $3 a
share. What is one share of this stock worth today?
A. $25.08
B. $27.12
C. $28.16
D. $28.68
E. $29.72
Type: PROBLEMS
81. Precision Machining's last annual dividend was $.80 a share. The firm will increase the dividend by 8
percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this
stock worth today if the required return is 9 percent?
A. $14.52
B. $15.06
C. $15.30
D. $16.97
E. $17.08
Type: PROBLEMS
19
82. Wilson's Leather Goods has net income of $41,600 and total equity of $381,000. The firm was
60,000 shares of stock outstanding at a price per share of $14.20. What is the firm's P/E ratio?
A. 16.21
B. 17.37
C. 19.09
D. 20.48
E. 21.94
P/E = $14.20 / ($41,600 / 60,000) = 20.48

Type: PROBLEMS
83. Jedstone Home Decors has net income of $26,000, total assets of $143,000, total liabilities of
$54,000, and a price-book ratio of 4.3. There are 50,000 shares of stock outstanding. What is the
firm's price-earnings ratio?
A. 14.72
B. 15.11
C. 16.48
D. 17.65
E. 19.46
P/E = {[($143,000 - $54,000) / 50,000] × 4.3} / ($26,000 / 50,000) = $7.654 / $.52 = 14.72

Type: PROBLEMS
84. Magnolia Farms has 125,000 shares of stock outstanding, sales of $1.2 million, and net income of
$152,000. Financial analysts have stated that the price-earnings ratio for this firm should be 15.5.
Given this information, what should be the current stock price?
A. $12.75
B. $15.68
C. $18.85
D. $19.19
E. $22.07
V(0) = ($152,000 / 125,000) × 15.5 = $18.848 = $18.85

Type: PROBLEMS
20
85. Ameth Growers has historically had a P/E ratio of 21.4. This ratio is considered a good estimate of
the future ratio. The firm currently has EPS of $2.34. These earnings are expected to increase by 3.4
percent next year. What is the expected price of this stock one year from now?
A. $45.54
B. $48.43
C. $50.25
D. $51.78
E. $53.79
Expected price = $2.34 × (1 + .034) × 21.4 = $51.778 = $51.78

Topic: EXPECTED PRICE
Type: PROBLEMS
86. Historically, JT Enterprises has a P/E ratio of 18.4. The firm has current net income of $83,500 with
150,000 shares of stock outstanding. The EPS growth rate is 12.6 percent. What is the expected price
of this stock one year from now?
A. $11.53
B. $13.14
C. $13.82
D. $15.38
E. $15.62
Expected price = ($83,500 / 150,000 × (1 + .126) × 18.4 = $11.533 = $11.53

Type: PROBLEMS
87. Wayne's Water Works has an historical P/CF ratio of 20.3. The current CFPS is $1.65 and the
projected CFPS growth rate is 8.6 percent. The current EPS is $.58. What is the expected price of this
stock one year from now?
A. $34.79
B. $36.38
C. $37.91
D. $39.27
E. $40.42
Expected price = $1.65 × (1 + .086) × 20.3 = $36.376 = $36.38

Type: PROBLEMS
21
88. Mark's Men's Wear has current SPS of $6.18. SPS are expected to increase at an annual rate of 9
percent. The historical P/E ratio is 12.1 and the historical P/S ratio is 7.08. What is the expected price
of this stock one year from now?
A. $39.33
B. $42.91
C. $47.69
D. $50.04
E. $52.68
Expected price = $6.18 × (1 + .09) × 7.08 = $47.692 = $47.69

Type: PROBLEMS
89. Southern Growers has current EPS of $1.42 and a projected EPS growth rate of 14 percent.
Historically, the company's P/E ratio has been 24.8 with SPS of $7.20. What is the expected price of
this stock one year from now?
A. $30.89
B. $40.15
C. $48.62
D. $51.18
E. $62.09
Expected price = $1.42 × (1 + .14) × 24.8 = $40.146 = $40.15

Type: PROBLEMS
90. Currently, Major Industries of Ohio has sales of $3.4 million, net profit of $268 thousand, and 400
thousand shares of stock outstanding. The sales and net profit are each expected to grow by 7.5
percent annually. The historical P/S ratio is 8.5. What is the expected price of this stock one year
from now?
A. $72.25
B. $73.14
C. $75.55
D. $77.01
E. $77.67
Expected price = ($3,400,000 / 400,0000 × (1 + .075) × 8.5 = $77.669 = $77.67

Type: PROBLEMS
22
91. The current book value per share of Trenton Motors is $11.90 and the required return on the stock is
15 percent. The firm expects earnings per share of $1.40 next year with annual earnings growth of 4
percent. What is the current value of this stock?
A. $8.40
B. $8.91
C. $16.07
D. $18.18
E. $20.30
Type: PROBLEMS
92. Marquis Jewelers has current earnings per share of $2.80 and an expected earnings growth rate of 4.5
percent. The required return on the stock is 11 percent and the current book value per share is $12.95.
What is the current value of this stock?
A. $29.07
B. $34.11
C. $36.05
D. $42.31
E. $49.00
Type: PROBLEMS
93. Amore Gifts has a book value per share of $6.42 and current earnings per share of $1.31. The
required return on Amore stock is 16 percent and the expected earnings growth rate is 7 percent.
What is one share of this stock worth today?
A. $8.18
B. $9.15
C. $9.56
D. $10.02
E. $10.58
Type: PROBLEMS
23
ch6 Summary
Category # of Questions
Jordan - Chapter 06 93
Topic: ARITHMETIC AVERAGE DIVIDEND GROWTH RATE 3
Topic: ARITHMETIC AVERAGE GROWTH RATE 1
Topic: BETA 2
Topic: CASH FLOW 1
Topic: CLEAN SURPLUS RELATIONSHIP 1
Topic: CONSTANT DIVIDEND GROWTH RATE MODEL 5
Topic: CONSTANT GROWTH RATE MODEL 1
Topic: CONSTANT PERPETUAL GROWTH 2
Topic: CONSTANT PERPETUAL GROWTH MODEL 10
Topic: DIVIDEND DISCOUNT MODEL 2
Topic: EARNINGS YIELD 1
Topic: ECONOMIC VALUE ADDED 1
Topic: EXPECTED PRICE 6
Topic: FUNDAMENTAL ANALYSIS 2
Topic: GEOMETRIC AVERAGE DIVIDEND GROWTH RATE 5
Topic: GEOMETRIC AVERAGE GROWTH RATE 1
Topic: GROWTH STOCKS 1
Topic: LIQUIDATING DIVIDEND VALUATION 4
Topic: NET INCOME AND CASH FLOW 1
Topic: PAYOUT RATIO 1
Topic: PRICE AND DIVIDEND GROWTH RATE 1
Topic: PRICE AND REQUIRED RETURN 1
Topic: PRICE-BOOK RATIO 2
Topic: PRICE-EARNINGS RATIO 5
Topic: PRICE-SALES RATIO 1
Topic: RESIDUAL INCOME MODEL 5
Topic: RETAINED EARNINGS 1
Topic: RETENTION RATIO 6
Topic: RETURN ON EQUITY 2
Topic: SUSTAINABLE GROWTH RATE 7
Topic: TWO-STAGE DIVIDEND GROWTH MODEL 9
Topic: VALUE LINE 1
Topic: VALUE STOCKS 1
Type: CONCEPTS 25
Type: DEFINITIONS 16
Type: PROBLEMS 51

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ch6

8. Beta is a measure of a stock's:

14. Value stocks are defined as stocks with:

19. The constant growth rate model assumes that:

23. The arithmetic average dividend growth rate is:

24. The retention ratio is equal to:

27. The sustainable growth rate is equal to:

41. The stock price is _____ the dividend growth rate.

Annual growth rate year 1 to 2: ($2.10 - $1.90) / $1.90 = .105263

Jordan - Chapter 06 #64

Annual growth rate year 1 to 2: ($1.75 - $1.50) / $1.50 = .166667

Jordan - Chapter 06 #65

Annual growth rate year 1 to 2: ($.57 - $.50) / $.50 = .14000

Jordan - Chapter 06 #66

Retention ratio = 1 - .30 = .70

Jordan - Chapter 06 #68

Retention ratio = ($310,000 - $180,000) / $310,000 = .419 = .42

Jordan - Chapter 06 #69

Return on equity = $236,000 / ($1,400,000 - $300,000) = .214545 = 21.45 percent

Jordan - Chapter 06 #70

Return on equity = ($1.36 × 125,000) / $980,000 = .17347 = 17.35 percent

Jordan - Chapter 06 #71

Jordan - Chapter 06 #72

Sustainable growth rate = [(60,000 × $2.44) / (60,000 × $17.27)] × (1 - .35) = [$146,400 /

Jordan - Chapter 06 #73

Jordan - Chapter 06 #75

P/E = $14.20 / ($41,600 / 60,000) = 20.48

Jordan - Chapter 06 #82

Jordan - Chapter 06 #83

V(0) = ($152,000 / 125,000) × 15.5 = $18.848 = $18.85

Jordan - Chapter 06 #84

Expected price = $2.34 × (1 + .034) × 21.4 = $51.778 = $51.78

Jordan - Chapter 06 #85

Expected price = ($83,500 / 150,000 × (1 + .126) × 18.4 = $11.533 = $11.53

Jordan - Chapter 06 #86

Expected price = $1.65 × (1 + .086) × 20.3 = $36.376 = $36.38

Jordan - Chapter 06 #87

Expected price = $6.18 × (1 + .09) × 7.08 = $47.692 = $47.69

Jordan - Chapter 06 #88

Expected price = $1.42 × (1 + .14) × 24.8 = $40.146 = $40.15

Jordan - Chapter 06 #89

Expected price = ($3,400,000 / 400,0000 × (1 + .075) × 8.5 = $77.669 = $77.67

Jordan - Chapter 06 #90

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