Chapter 18 – Equity Valuation Models
91. The dividend discount model
A. ignores capital gains.
B. incorporates the after-tax value of capital gains.
Difficulty: Moderate
92. Many stock analysts assume that a mispriced stock will
A. immediately return to its intrinsic value.
B. return to its intrinsic value within a few days.
Difficulty: Moderate
93. Investors want high plowback ratios
18–42
94. Because the DDM requires multiple estimates, investors should
Difficulty: Easy
95. According to Peter Lynch, a rough rule of thumb for security analysis is that
A. the growth rate should be equal to the plowback rate.
B. the growth rate should be equal to the dividend payout rate.
Difficulty: Moderate
96. For most firms, P/E ratios and risk
A. will be directly related.
Difficulty: Moderate
18–52
120. Consider the free cash flow approach to stock valuation. F&G Manufacturing Company
is expected to have before-tax cash flow from operations of $750,000 in the coming year. The
firm’s corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be
invested in new fixed assets. Depreciation for the year will be $125,000. After the coming
year, cash flows are expected to grow at 7% per year. The appropriate market capitalization
rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The total
value of the equity of F&G Manufacturing Company should be
A. $1,615,156.50
B. $2,479,168.95
Difficulty: Difficult
121. Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in
year 2 of $1.97, and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is
expected to grow at the rate of 8% per year. An appropriate required return for the stock is
11%. The stock should be worth _______ today.
Difficulty: Difficult