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Multiple Choice Quiz
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1

A company has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.
A)3.0%
B)4.8%
C)8.25%
D)9.0%
E)none of the above
2

Historically, P/E ratios have tended to be
A)lower when inflation has been high.
B)higher when inflation has been high.
C)uncorrelated with inflation rates but correlated with other macroeconomic variables.
D)uncorrelated with any macroeconomic variables including inflation rates.
E)none of the above
3

Recent empirical research indicates
A)that real rates of return on stocks are negatively correlated with inflation.
B)that real rates of return on stocks are uncorrelated with inflation.
C)that real rates of return on stocks are positively correlated with inflation.
D)nothing about real rates of return on stocks.
E)the ratio of the real rate of return on stocks to inflation is 1.0.
4

One of the problems with attempting to forecast stock market values is that
A)there are no variables that seem to predict market return.
B)the earnings multiplier approach can only be used at the firm level.
C)dividend payout ratios are highly variable.
D)the level of uncertainty surrounding the forecast will always be quite high.
E)none of the above
5

A preferred stock will pay a dividend of $2.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A)$0.39
B)$0.56
C)$25.00
D)$56.25
E)none of the above
6

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has
A)an anticipated earnings growth rate which is less than that of the average firm.
B)greater cyclicality of earnings growth than that of the average firm.
C)less predictable earnings growth than that of the average firm.
D)a dividend yield which is less than that of the average firm greater cyclicality of earnings growth than that of the average firm.
E)none of the above
7

If a firm has a required rate of return equal to the ROE
A)the amount of earnings retained by the firm does not affect market price or the P/E.
B)the firm can increase market price and P/E by increasing the growth rate.
C)the firm can increase market price and P/E by retaining more earnings.
D)A and B
E)none of the above
8

The goal of fundamental analysts is to find securities
A)with high market capitalization rates.
B)with a positive present value of growth opportunities.
C)whose intrinsic value exceeds market price.
D)all of the above
E)none of the above
9

Many stock analysts assume that a mispriced stock will
A)immediately return to its intrinsic value.
B)gradually approach its intrinsic value over several years.
C)never return to its intrinsic value.
D)return to its intrinsic value within a few days.
E)none of the above
10

Because the DDM requires multiple estimates, investors should
A)carefully examine inputs to the model.
B)not use this model without expert assistance.
C)perform sensitivity analysis on price estimates.
D)feel confident that DDM estimates are correct.
E)both A and C





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