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Tutorial 4

Financial markets and institutions

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12 views7 pages

Tutorial 4

Financial markets and institutions

Uploaded by

selenaarkstory36
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Choose the correct answer:

1) What is the primary principle to value any investment?


a) Calculating past cash flows
b) Estimating future potential growth
c) Computing the present value of all future cash flows
d) Calculating the market demand

2) Which one of the following models is not listed as a way of computing the
price of common stock.
a) The One-Period Valuation Model
b) The Gordon Growth Model
c) The Discounted Cash Flow Model
d)Price Earnings Valuation Method

3) The cash flows of a stockholder may earn comes from which one of the
following.
a) dividends
b) sales price
c) both a and b
d) otherwise

4) Which model assumes a constant growth rate in dividends.


a) Price Earnings Valuation Method
b) The One-Period Valuation Model
c) Gordon growth model
d) The Generalized Dividends validation model
5)What does the One-Period Valuation Model assume about holding a stock?
a) Holding it for multiple periods and receive multiple dividends.
b) Holding it for one period to get a dividend, then sell the stock.
C) Never sell the stock and keep it indefinitely.
d) selling the stock before receiving any dividends.

6) In the One-Period Valuation Model formula, what does D1 represent?


a) The dividend paid at the end of year 1
b) The current stock price
c) The required return on equity
d) The price at the end of the first year

7) Suppose you consider buying a stock from ABC company which is currently
pays $0.20 per year in dividends. This stock will be selling for $55 in one year.
You expect a required return of 10% on your investment. What is the value of
this stock according to the one-period validation model?
a) $ 53.46
b) $55.20
c) $50.18
d) otherwise

8) According to the stock’s current price you calculated in the previous question,
should you buy this stock if it is currently trading at $48 in the market.
a) True, it is a good idea
b) No, it is not a good idea

9) Regarding to the previous question why is the stock selling for less than $
50.18?
a) investors place a different risk on cash flows
b) estimate the cash flow to be less than you do
c) both a and b
d) otherwise

10) What is one-period valuation model primarily used to determine?


a) The future price of a stock
b) The current value of a stock based on one period of dividends
c) The earnings growth rate of a stock
d) The net profit margin of a company

11) How can the one-period dividend valuation model be extended?


a) By only focusing on dividends and ignoring the final sale price
b) By including additional factors such as company debt
c) By applying it over multiple periods instead of just one
d) By considering cash flows from other assets

12) What two types of cash flows does an investor receive from holding a stock?
a) Dividends and interest payments
b) Dividends and a final sales price
c) Interest payments and a final sales price
d) Capital gains and dividends

13) The value of stock is the present value of all future cash flows.
/ The only cash flows that an investor will receive from investing their money
in stock is dividends.
a) True/ True
b) False/ True
c) True/ False
d) False/ False
14) What is the main concept behind using the multi-period dividend valuation
model?
a) To estimate stock value by predicting company expenses
b) To determine stock price by considering both dividends
and resale value over time
c) To evaluate a company's debt to equity ratio
d) To assess future earnings growth solely through dividends

15) According to the Gordon Growth Model dividends are assumed to continue
growing at a ______ rate forever.
a) increasing
b) decreasing
c) constant
d) otherwise

16) In the Gordon Growth Model formula, what does g represent?


a) The required return on an investment in equity
b) The most recent dividends paid
c) The expected constant growth rate in dividends
d) none of the above is true

17) According to Gordon Growth Model formula, the growth rate is assumed to
be ______ than the required return on equity 𝐾𝑒 .
a) greater
b) less
c) both a and b
d) otherwise
18) The Gordon Growth Model assume that:
18-1) Dividends are assumed to continue growing at an increasing rate forever.
18-2) The growth rate is assumed to be less than the required return on equity.
a) True/ True
b) False/ True
c) True/ False
d) False/ False

19) What is the current market price of XYZ company, assuming dividends grow
at a constant rate of 9.98%, 𝐷0 = $2.00, and the required return is 14%.
a) 52.67
b) 55.65
c) 53.83
d) 54.72

20) The Price Earnings (PE) ratio measures how much the market is willing to
pay for each dollar of ___.
a) Net profit
b) Stock price
c) Earnings
d) Revenue

𝑃
21) What does the formula ∗ 𝐸 = 𝑃 represent?
𝐸

a) The formula for calculating stock dividends


b) The calculation of a firm’s book value
c) The calculation of the stock price using the PE ratio
d) The formula for gross profit
22) A higher-than-average PE ratio might indicate that the market expects
earnings to ___.
a) Decline
b) Stay constant
c) Rise in the future
d) Drop significantly

23) A high PE ratio could also mean that the market perceives the firm's earnings
as ___.
a) Risky and volatile
b) Overvalued
c) Safe and low risk
d) Stable but declining

24) The same industry are expected to have similar PE ratios in the long run.
/The best method of stock validation is the dividend valuation approach.
a) True/ True
b) False/ True
c) True/ False
d) False/ False

25) The best method of stock valuation is ______.


a) interest rate valuation approach
b) dividend valuation approach
c) debt claim valuation approach
d) none of the above

26) Which one of the following represent a reason why applying dividend
valuation approach may be difficult.
a) firm is not paying dividends
b) firm has an erratic growth rate
c) both a and b
d) none of the above is true

27) If the price earning per share for ABC company is projected to be $2.18. And
the average industry PE ratio for Tech-companies similar to ABC company is 22,
what is the current stock price?
a) 47.96
b) 10.09
c) 36.28
d) otherwise

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