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CHAPTER 11—SECURITY VALUATION PRINCIPLES
TRUE/FALSE
1. Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down
Approach" to the valuation process.
ANS: F PTS: 1
2. Empirical studies have shown that the market factor has increased over time and now accounts for the
majority of an individual stock's price variance.
ANS: F PTS: 1
3. The general economic influences would include inflation, political upheavals, monetary policy, and
fiscal policy initiatives.
ANS: T PTS: 1
4. Given an optimistic economic and stock-market outlook for a country, the investor should underweight
the allocation to this country in his/her portfolio.
ANS: F PTS: 1
5. The importance of an industry's performance on an individual stock's performance varies across

industries.
ANS: T PTS: 1
6. If the estimated value of an asset is greater than the market price, you would want to buy the investment.
ANS: T PTS: 1
7. The most difficult part of valuing a bond is determining the required rate of return on this investment.
ANS: T PTS: 1
8. A preferred stock is a perpetuity.
ANS: T PTS: 1
9. Growth companies are those firms that consistently earn higher rates of return by assuming greater
amounts of risk.
ANS: F PTS: 1
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10. The growth rate of dividends and profit margin are the main determinants of the P/E ratio.
ANS: F PTS: 1
11. The dividend growth models are only meaningful for companies that have a required rate of return that
exceeds their dividend growth rate.
ANS: T PTS: 1
12. The three step valuation process consists of (1) analysis of alternative economies and markets, (2)
analysis of alternative industries and (3) analysis of industry influences.
ANS: F PTS: 1
13. The two components that are required in order to carry out asset valuation are (1) the stream of expected
cash flows and (2) the required rate of return.
ANS: T PTS: 1
14. The importance of an industry's performance on an individual stock's performance varies across
industries.
ANS: T PTS: 1
15. If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.
ANS: T PTS: 1
16. The required rate of return is determined by (1) the real risk free rate, (2) the expected rate of inflation
and (3) liquidity risk.
ANS: F PTS: 1
17. The price of a bond can be calculated by discounting future coupons over the bonds life by the yield to
maturity.
ANS: F PTS: 1
18. An example of a relative valuation technique is the Price/Cash Flow ratio.
ANS: T PTS: 1
19. Discounted cash flow techniques for equity valuation may use one of the following: (1) dividends, (2)
Free cash flow or (3) coupons.
ANS: F PTS: 1
20. In dividend discount models (DDM) with supernormal growth, supernormal growth may continue
indefinitely.
ANS: F PTS: 1
21. The real risk free rate depends on the real growth in the economy and can be affected for short time
periods by temporary tightness or ease in the capital markets.
ANS: T PTS: 1
22. The risk premium is impacted by business risk, financial risk, and liquidity risk.
ANS: T PTS: 1
23. A bond typically pays interest payments every six months equal to the coupon rate times the face value
of the bond.
ANS: F PTS: 1
24. The value of preferred stock can be calculated by dividing its dividend by the required rate of return.
ANS: T PTS: 1
25. A relative valuation technique is appropriate to consider when you have a good set of comparable
entities.
ANS: T PTS: 1
26. The infinite period dividend discount model (DDM) can be used to value a supernormal growth
company.
ANS: F PTS: 1
27. The growth rate in equity without any external financing is determined by multiplying the payout ratio
times the return on equity (ROE).
ANS: F PTS: 1
28. The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate
of zero in the DDM model.
ANS: T PTS: 1
29. An equity investor's required rate of return is influenced by the economy's real risk-free rate, the
expected rate of inflation, and a risk premium.
ANS: T PTS: 1
MULTIPLE CHOICE
1. Which of the following is not a consideration in the three-step valuation process?

a. Analysis of alternative economies
b. Analysis of security markets
c. Analysis of alternative industries
d. Analysis of individual companies
e. None of the above (that is, all are considerations in the three-step valuation process)
ANS: E PTS: 1 OBJ: Multiple Choice
2. Which of the following is not considered a basic economic force?

a. Fiscal policy
b. Monetary policy
c. Inflation
d. P/E ratio
e. None of the above (that is, all are basic economic forces)
ANS: D PTS: 1 OBJ: Multiple Choice
3. The process of fundamental valuation requires estimates of all the following factors, except
a. The time pattern of returns.
b. The economy's real risk-free rate.
c. The risk premium for the asset.
d. The times series of stock prices.
e. The expected rate of inflation.
4. Which of the following is correct?

a. If estimated value > Market price, you should buy.
b. If estimated value > Market price, you should sell.
c. If estimated value < Market price, you should sell.
d. If estimated value < Market price, you should buy.
e. Choices a and c.
5. The value of a corporate bond can be derived by calculating the present value of the interest payments
and the present value of the face value at the bond's
a. Current yield.
b. Coupon rate.
c. Required rate of return.
d. Effective rate.
e. Prime rate.
ANS: C PTS: 1 OBJ: Multiple Choice
6. Which securities can be valued by dividing the annual dividend by the required rate of return?
a. Low coupon bonds
b. Junk bonds
c. Common stocks
d. Preferred stocks
e. Constant growth common stocks
7. According to the dividend growth model, if a company were to declare that it would never pay
dividends, its value would be
a. Based on earnings.
b. Based on expectations regarding.
c. Higher than similar firms since it could reinvest a greater amount in new projects.
d. Zero.
e. Based on the capital asset pricing model.
8. Dividend growth is a function of

a. Return on equity.
b. The retention rate.
c. The payout ratio.
d. All of the above.
e. None of the above.
9. Growth rates of the (1) labor force, (2) average number of hours worked and (3) labor productivity are
the main determinants of a foreign country's
a. Dividend payout ratio.
b. Beta.
c. Real risk free rate.
d. Nominal risk free rate.
e. Risk premium.
10. The growth rate of equity earnings without external financing is equal to
a. Retention rate plus return on equity.
b. Retention rate minus return on equity.
c. Retention rate divided by return on equity.
d. Retention rate times return on equity.
e. Return on equity divided by retention rate.
11. Which of the following factors influence an investor's required rate of return?
a. The economy's real risk-free rate (RFR)
b. The expected rate of inflation (I)
c. A risk premium
d. All of the above
e. None of the above
12. The P/E ratio is determined by
a. The required rate of return.
b. The expected dividend payout ratio.
c. The expected growth rate of dividends.
d. Choices a and b
e. All of the above
13. Which of the following statements regarding fundamental and relative valuation techniques is true?
a. Both techniques require an appropriate estimate of the required rate of return and the growth
rate.
b. Both techniques require an estimate of future cash flows and a discount rate.
c. Both techniques require an estimate of future cash flows and a growth rate.
d. Both techniques require an estimate of future cash flows, the required rate of return and a
growth estimate.
e. All of the above are true.
ANS: A PTS: 1 OBJ: Multiple Choice
14. Which of the following is an underlying assumption of the constant growth dividend discount model
(DDM)?
a. Dividends have a constant growth rate
b. The constant growth rate of dividends will continue for an infinite time period
c. The required rate of return is greater than the expected growth rate
d. All of the above
15. All of the following are ways in which a firm can increase its growth rate of equity earnings without any
external financing except
a. Decreasing its dividend payments
b. Increasing its retention ratio
c. Increasing its return on equity (ROE)
d. Increasing its return on assets (ROA)
e. All of the above will increase the firm's growth rate without external financing
16. The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the
firm's
a. Required rate of return based on the capital asset pricing model (CAPM)
b. Required rate of return based on the dividend discount model (DDM)
c. Weighted average cost of capital (WACC)
d. Historical cost of debt and equity
e. All of the above are appropriate depending on the situation
Exhibit 11.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market.
The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5
percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25
percent.
17. Refer to Exhibit 11.1. What is the current value of these securities?
a. $1149.94
b. $433.15
c. $1151.92
d. $860.50
e. $863.35
ANS: C
PTS: 1 OBJ: Multiple Choice Problem
18. Refer to Exhibit 11.1. What will be the value of these securities in one year if the required return is 7
percent?
a. $970.14
b. $388.13
c. $1031.15
d. $1035.81
e. $972.52
ANS: E
Exhibit 11.2
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current
market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued
with an 8 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10
percent.
a. $900.18
b. $1151.92
c. $972.52
d. $1113.63
e. $904.00
ANS: A
20. Refer to Exhibit 11.2. What will be the value of these securities in one year if the required return is 6
percent?
a. $1151.92
b. $972.52
c. $1100.15
d. $900.18
e. $936.72
ANS: C
Exhibit 11.3
A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current
market. The firm's outstanding bond issue has 6 years remaining until maturity. The bonds were issued
with a 6 percent coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the
required rate has risen to 10 percent.
a. $656.40
b. $899.00
c. $822.70
d. $569.50
e. $962.00
ANS: C
P = 30(PVIFA5%,12) + 1000(PVIF5%,12)
P = 30(8.8633) + 1000(.5568) = $822.70
22. Refer to Exhibit 11.3. What will be the value of these securities in one year if the required return declines
to 8 percent?
a. $899.43
b. $862.50
c. $869.88
d. $918.93
e. $946.98
ANS: D
P = 30(PVIFA4%,10) + 1000(PVIF4%,10)
P = 30(8.1109) + 1000(.6756) = $918.93
23. In 2004, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent annual dividend.
Due to changes in the overall economy and in the company's financial condition investors are now
requiring a 10 percent return. What price would you be willing to pay for a share of the preferred if you
receive your first dividend one year from now?
a. $100
b. $110
c. $75
d. $90
e. $85
ANS: D
Dividend = .09  $100 = $9  Price = 9  0.1 = $90
24. In 2004, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due
to changes in the overall economy and in the company's financial condition investors are now requiring
an 7 percent return. What price would you be willing to pay for a share of the preferred if you receive
your first dividend one year from now?
a. $42.86
b. $30.00
c. $31.54
d. $33.38
e. $38.37
ANS: A
Dividend = .06  $50 = $3  Price = 3  0.07 = $42.85
25. In 2004, Venus Fly Co. issued a $75 par value preferred stock which pays a 7 percent annual dividend.
requiring a 5 percent return. What price would you be willing to pay for a share of the preferred if you
a. $125
b. $84
c. $91
d. $145
e. $105
ANS: E
Dividend = .07  $75 = $5.25  Price = 5.25  0.05 = $105
26. In 2004, Swisten Inc. issued a $150 par value preferred stock that pays an 8 percent annual dividend.
requiring an 15 percent return. What price would you be willing to pay for a share of the preferred if you
a. $80
b. $75
c. $59
d. $95
e. $110
ANS: A
Dividend = .08  $150 = $12  Price = 12  0.15 = $80
27. Using the constant growth model, a decrease in the required rate of return from 15 to 13 percent
combined with an increase in the growth rate from 5 to 6 percent would cause the price to
a. Rise more than 50%.
b. Rise less than 50%.
c. Remain constant.
d. Fall more than 50%.
e. Fall less than 50%.
ANS: B
%= P2/P1 = [(D0)(1 + g2)/(k2  g2)]  [(D0)(1 + g1)/(k1  g1)]  1
= [(D0)(1 + 0.06)/(0.13  0.06)]  [(D0)(1 + 0.05)/(0.15  0.05)]  1
= (15.14  10.5)  1 = 44.22% < 50%
28. Using the constant growth model, an increase in the required rate of return from 19 to 17 percent
a. Fall more than 2%
b. Fall less than 2%.
c. Remain constant.
d. Rise more than 2%.
e. Rise less than 3%.
ANS: B
% = P2/P1 = [(D0)(1 + g2)/(k2  g2)]  [(D0)(1 + g1)/(k1  g1)]  1
= [(D0)(1 + 0.09)/(0.17  0.09)]  [(D0)(1 + 0.11)/(0.19  0.11)]  1
= (13.625  13.875)  1 = 1.8% > 2%
a. Rise more than 1%
c. Remain constant.
ANS: B
% = P2/P1 = [(D0)(1 + g2)/(k2  g2)]  [(D0)(1 + g1)/(k1  g1)]  1
= [(D0)(1 + 0.07)/(0.15  0.07)]  [(D0)(1 + 0.06)/(0.14  0.06)]  1
= (13.375  13.25)  1 = 0.94% < 1%
a. Rise more than 3%
c. Remain constant.
ANS: B
% = P2/P1 = [(D0)(1 + g2)/(k2  g2)]  [(D0)(1 + g1)/(k1  g1)]  1
= [(D0)(1 + 0.11)/(0.20  0.11)]  [(D0)(1 + 0.08)/(0.17  0.08)]  1
= (12.33  12.00)  1 = 2.75% < 3%
a. Fall more than 4%
b. Fall less than 4%.
c. Rise more than 4%
d. Rise less than 4%.
e. Remain constant.
ANS: D
% = P2/P1 = [(D0)(1 + g2)/(k2  g2)]  [(D0)(1 + g1)/(k1  g1)]  1
= [(D0)(1 + 0.12)/(0.18  0.12)]  [(D0)(1 + 0.08)/(0.14  0.08)]  1
= (18.66  18.00)  1 = 3.77% < 4%
Exhibit 11.4
Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3
percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate
will increase to 5 percent for the next three years and the stock will then reach $25 per share.
32. Refer to Exhibit 11.4. How much should you be willing to pay for the stock if you require a 17 percent
return?
a. $16.97
b. $22.16
c. $21.32
d. $32.63
e. $23.63
ANS: B
33. Refer to Exhibit 11.4. How much should you be willing to pay for the stock if you feel that the 5 percent
growth rate can be maintained indefinitely and you require a 17 percent return?
a. $22.16
b. $19.28
c. $21.32
d. $23.63
e. $25.46
ANS: D
P = (2.70  1.05)  (0.17  0.05) = $23.63
Exhibit 11.5
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic
4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth
rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
34. Refer to Exhibit 11.5. How much should you be willing to pay for the stock if you require a 16 percent
return?
a. $17.34
b. $18.90
c. $19.09
d. $19.21
ANS: D
35. Refer to Exhibit 11.5. How much should you be willing to pay for the stock if you feel that the 7 percent
growth rate can be maintained indefinitely and you require a 16 percent return?
a. $11.15
b. $14.44
c. $14.86
d. $18.90
e. $19.24
ANS: C
P = (1.25  1.07)  (0.16  0.07) = $14.86
36. Ross Corporation paid dividends per share of $1.20 at the end of 1990. At the end of 2000 it paid
dividends per share of $3.50. Calculate the compound annual growth rate in dividends.
a. 52.17%
b. 34.28%
c. 23%
d. 19.17%
e. 11.29%
ANS: E
g = (3.50/1.20)1/10  1 = 11.29%
37. Hunter Corporation had a dividend payout ratio of 63% in 1999. The retention rate in 1999 was
a. 37%
b. 63%
c. 50%
d. 0%
e. 100%
ANS: A
retention rate = 1  .63 = 37%
38. The beta for the DAK Corporation is 1.25. If the yield on 30 year T-bonds is 5.65%, and the long term
average return on the S&P 500 is 11%. Calculate the required rate of return for DAK Corporation.
a. 12.34%
b. 7.06%
c. 13.74%
d. 5.35%
e. 5.65%
ANS: A
required return = .0565 + 1.25(.11  .0565) = 12.34%
39. Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will
grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to
level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the
intrinsic value using the multistage model.
a. $5.56
b. $66.4
c. $49.31
d. $43.66
e. none of the above
ANS: C
40. The P/E ratio for BMI Corporation is 21, and the P/S ratio is 5.2. The industry P/E ratio is 35 and the
industry P/S ratio is 7.5. Based on relative valuation, BMI is
a. undervalued on the basis of relative P/E and relative P/S.
b. overvalued on the basis of relative P/E and undervalued on the basis of relative P/S.
c. undervalued on the basis of relative P/E and overvalued on the basis of relative P/S.
d. overvalued on the basis of relative P/E and relative P/S.
e. none of the above.
ANS: A
Relative P/E = 21/35 = undervalued
Relative P/S = 5.2/7.5 = undervalued
Exhibit 11.6
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8%
per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year.
Assume that the appropriate discount rate is 7%.
41. Refer to Exhibit 11.6. The dividends for years 1, 2, and 3 are
a. $2, $2.08, $2.16
b. $2, $2.05, $2.10
c. $2.16, $2.24, $2.32
d. $2.16, $2.33, $2.52
e. $2.07, $2.14, $2.21
ANS: D
Year 1 Dividends = 2(1 + .08) = $2.16
Year 2 Dividends = 2(1 + .08)2 = $2.33
Year 3 Dividends = 2(1 + .08)3 = $2.52
42. Refer to Exhibit 11.6. The future price of the stock in year 5 is
a. $113.40
b. $122.47
c. $132.27
d. $142.85
e. $154.35
ANS: E
Future price of stock in year 5 = P5 = D6/(k  g)
where g is the normal growth rate = 5%
D6 = 2(1 + .08)5(1 + .05) = $3.087
P5 = 3.087/(.07  .05) = $154.35
43. Refer to Exhibit 11.6. The present value today of dividends for years 1 to 5 is
a. $4.06
b. $10.28
c. $12.40
d. $14.52
e. $10.0
ANS: B
The present value today of dividends from years 1 to 5 =
2.16/(1.07) + 2.33/(1.07)2 + 2.52/(1.07)3 + 2.72/(1.07)4 + 2.94/(1.07)5 = $10.28
44. Refer to Exhibit 11.6. The price of the stock today (P0) is
a. $136.29
b. $133.03
c. $120.33
d. $123.43
e. $126.60
ANS: C
P0 = PV of dividends yr1 to yr5 + PV of P5
= 10.28 + 154.35/(1.07)5 = $120.33
Exhibit 11.7
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of
9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per
year. Assume that the appropriate discount rate is 7%.
45. Refer to Exhibit 11.7. The dividends for years 1, 2, and 3 are
a. $1.5, $2.0, $2.05
b. $1.64, $1.78, $1.94
c. $1.64, $1.94, $2.24
d. $1.5, $2.40, $3.30
e. $2.07, $2.14, $2.21
ANS: B
Year 1 Dividends = 1.5(1 + .09) = $1.64
Year 2 Dividends = 1.5(1 + .09)2 = $1.78
Year 3 Dividends = 1.5(1 + .09)3 = $1.94
46. Refer to Exhibit 11.7. The future price of the stock in year 3 is
a. $81.75
b. $84.81
c. $92.56
d. $101.85
e. $111.16
ANS: D
Future price of stock in year 3 = P3 = D4/(k  g)
where g is the normal growth rate = 5%
D4 = 1.5(1 + .09)3(1 + .05) = $2.037
P3 = 2.037/(.07  .05) = $101.85
47. Refer to Exhibit 11.7. The present value today of dividends for years 1 to 3 is
a. $4.67
b. $3.08
c. $5.67
d. $4.5
e. $1.53
ANS: A
The present value today of dividends from years 1 to 3 =
1.64/(1.07) +1.78/(1.07)2 + 1.94/(1.07)3 = $4.67
48. Refer to Exhibit 11.7. The price of the stock today (P0) is
a. $84.81
b. $87.81
c. $91.09
d. $94.32
e. $97.61
ANS: B
P0 = PV of dividends yr1 to yr5 + PV of P3
= 4.67 + 101.85/(1.07)3 = $87.81
49. Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was
$4. If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is
6%, and earnings is 6%, the firm's P/E ratio is
a. 8.33
b. 33.33
c. 44.44
d. 11.11
ANS: A
50. What is the value of a 10% semi-annual coupon bond with a par value of $1,000 that matures in 5 years
and has a required rate of return of 9%?
a. $1,021.95
b. $1,038.90
c. $1,039.56
d. $1,064.18
e. $1,078.23
ANS: C
51. What is the value of a preferred stock that has a par value of $100, a required rate of return of 11%, and
pays a 7 percent annual dividend?
a. $63.64
b. $157.14
c. $909.09
d. $1,428.57
e. $2,500.00
ANS: A
Dividend = .07*$100 = $7. Value of a perpetuity = D/k = $7/.11 = $63.64
52. XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a
constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%,
what is the current value of this common stock?
a. $1.50
b. $12.50
c. $13.25
d. $25.00
e. $26.50
ANS: E
Using the DDM: P = $1.50(1.06)/(.12  .06) = $1.59/.06 = $26.50
Exhibit 11.8
Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The
corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two
years of rapid growth dividends are expected to grow at a constant rate of 9% forever.
53. Refer to Exhibit 11.8. If the required return is 14%, what is the value of Fast Grow Corporation common
stock today?
a. $40.26
b. $42.38
c. $46.70
d. $52.63
e. $62.78
ANS: D
54. Refer to Exhibit 11.8. Assume that the annual dividend grows at a constant rate of 9% indefinitely
instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9%?
a. $40.00
b. $43.60
c. $45.60
d. $47.80
e. $52.40
ANS: B
P = $2(1.09)/(.14  .09) = 2.18/.05 = $43.60
55. What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value
of $10,000 that matures in 20 years if you require an 8 percent return?
a. $9,652.89
b. $10,356.65
c. $11,359.03
d. $11,979.28
e. $12,385.62
ANS: D
Using the calculator TVM functions

PMT = Coupon payments = .10($10,000)/2 = $1,000/2 = $500
N = number of 6-month periods = 20*2 = 40
I/Y = required rate of return/2 = 8%/2 = 4%
FV = Par Value = $10,000
Compute for PV = value today = $11,979.28
56. The Absolute Finance Company (AFC) earned $5 a share last year and paid a dividend of $2 per share.
Next year, you expect AFC to earn $6 a share next year and continue its payout ratio. Assume that you
expect to sell the stock for $45 a year from now. If you require a 13 percent return on this stock, how
much would you be willing to pay for it?
a. $41.95
b. $43.21
c. $45.13
d. $46.72
e. $47.40
ANS: A
Expected dividend in one year = (2/5)(6) = $2.40
Value today = ($45 + $2.40)/(1.13) = $41.95
57. A company has a dividend payout ratio of 35 percent. If the company's return on equity is 15 percent,
what is the expected growth rate if no new outside financing is used?
a. 4.50%
b. 5.25%
c. 7.75%
d. 8.25%
e. 9.75%
ANS: E
g = RR(ROE) = (1  .35)(.15) = 0.0975 or 9.75%
58. A company's dividend last year was $3.00. Dividends are expected to grow indefinitely at 7% and the
required rate of return for the stock is 13%. What is the value of the stock today?
a. $2.83
b. $23.08
c. $24.69
d. $50.00
e. $53.50
ANS: E
Value of stock today = $3.00(1.07)/(.13  .07) = $3.21/0.06 = $53.50

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CHAPTER 11—SECURITY VALUATION PRINCIPLES

5. The importance of an industry's performance on an individual stock's performance varies across

8. A preferred stock is a perpetuity.

18. An example of a relative valuation technique is the Price/Cash Flow ratio.

1. Which of the following is not a consideration in the three-step valuation process?

2. Which of the following is not considered a basic economic force?

4. Which of the following is correct?

8. Dividend growth is a function of

12. The P/E ratio is determined by

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

Relative P/S = 5.2/7.5 = undervalued

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

Using the calculator TVM functions

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

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