Chapter 18 – Equity Valuation Models
Chapter 18
Equity Valuation Models
Multiple Choice Questions
1. ________ is equal to the total market value of the firm’s common stock divided by (the
replacement cost of the firm’s assets less liabilities).
A. Book value per share
B. Liquidation value per share
Difficulty: Easy
2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.
18–14
34. You are considering acquiring a common stock that you would like to hold for one year.
You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of
the year. The maximum price you would pay for the stock today is _____ if you wanted to
earn a 12% return.
Difficulty: Moderate
35. You are considering acquiring a common stock that you would like to hold for one year.
You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of
the year. The maximum price you would pay for the stock today is _____ if you wanted to
earn a 15% return.
Difficulty: Moderate
18–17
41. 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.
Difficulty: Easy
42. The most popular approach to forecasting the overall stock market is to use
Difficulty: Easy
Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free
rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect
the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool
Company’s stock is 1.25.
Chapter 18 – Equity Valuation Models
18–19
Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends
are expected to grow at the rate of 6% per year. The risk-free rate of return is 5% and the
expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of
1.2.
46. What is the return you should require on Torque’s stock?
Difficulty: Moderate
47. What is the intrinsic value of Torque’s stock?
Difficulty: Difficult
18–20
48. Midwest Airline is expected to pay a dividend of $7 in the coming year. Dividends are
expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the
expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of
3.00. The return you should require on the stock is ________.
Difficulty: Moderate
49. Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year.
Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%
and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining
Company has a beta of -0.25. The return you should require on the stock is ________.
Difficulty: Moderate