Financial Markets And Institutions 12th Edition By Jeff Madura – Test Bank

1. The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm’s stock.
a. firm’s; industry

b. firm’s; firm’s

c. average industry; industry
d. average industry; firm’s

ANSWER: d
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.01
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Knowledge

2. The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm’s future earnings or in choosing the industry composite used to derive the PE ratio.
a. True

b. False

ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.01
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Comprehension

3. Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork’s dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
a. 33.33

b. 166.67

c. 41.67

d. 60.00

ANSWER: c
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FMAI.MADU.15.11.01
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Application

4. The limitations of the dividend discount model are more pronounced when valuing stocks
a. that pay most of their earnings as dividends.
b. that retain most of their earnings.

c. that have a long history of dividends.

d. that have constant earnings growth

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FMAI.MADU.15.11.01
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Knowledge

5. Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel’s industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.
a. 113.95

b. 111.32

c. 105.25

d. none of the above
ANSWER: a
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: FMAI.MADU.15.11.01
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Application

6. When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock’s returns.
a. beta; standard deviation
b. standard deviation; beta
c. intercept; beta

d. beta; error term

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FMAI.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Comprehension

7. The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.
a. Treasury bond rate
b. prime rate

c. discount rate

d. federal funds rate

ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Knowledge

8. A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.
a. True

b. False

ANSWER: b
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Comprehension

9. Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.
a. favorably; adversely

b. adversely; adversely

c. favorably; favorably

d. adversely; favorably

ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.03
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Knowledge

10. A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.
a. True

b. False

ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: FMAI.MADU.15.11.03
NATIONAL STANDARDS: United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS: United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS: Bloom’s: Knowledge