Reading 56: An Introduction to Security Valuation LOSf习题精 2010, suppliers, products, required, company

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LOS f: Estimate the dividend growth rate, given the components of the required rate of return incorporating the earnings retention rate and current stock price.

If a company can convince its suppliers to offer better terms on their products leading to a higher profit margin, the return on equity (ROE) will most likely:

A) increase and the stock price will increase

B) increase and the stock price will decline.

C) decrease and the stock price will increase.

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Better supplier terms lead to increased profitability. Better profit margins lead to an increase in ROE. This leads to an increase in the dividend growth rate. The difference between the cost of equity and the dividend growth rate will decline, causing the stock price to increase.

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Assuming a firm does not currently have excessive debt, a decrease in leverage will most likely cause the firm’s stock price to:

A) decrease.

B) remain the same.

C) increase.

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The firm’s stock price will most likely fall for two reasons: 1) loss of the debt tax shelter; 2) decrease in the leverage multiplier, A/E, causing ROE to decline.

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When a company’s return on equity (ROE) is 12% and the dividend payout ratio is 60%, what is the implied sustainable growth rate of earnings and dividends?

A) 4.0%.

B) 4.8%.

C) 7.8%.

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g = ROE × retention ratio = ROE × (1 – payout ratio) = 12 (0.4) = 4.8%

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Which of the following statements concerning security valuation is least accurate?

A) The best way to value a company with no current dividend but who is expected to pay dividends in three years is to use the temporary supernormal growth (multistage) model.

B) The best way to value a company with high and unsustainable growth that exceeds the required return is to use the temporary supernormal growth (multistage) model.

C) A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on equity of 12%, and a 15% required return is worth $18.24.

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A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on new investment of 12%, and a 15% required return is worth $20.64. The growth rate is (1 – 0.40) × 0.12 = 7.2%. The expected dividend is then ($1.50)(1.072) = $1.61. The value is then (1.61) / (0.15 – 0.072) = $20.64.

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Which of the following statements concerning security valuation is least accurate?

A) If the firm's payout ratio is 40%, has a required return of 12%, and a dividend growth rate of 7%, the firm's price to earnings (P/E) ratio should be 8.

B) The liquidity risk of countries refers to the size and activity of the country's capital markets.

C) ROA times one minus the dividend payout ratio is the firm's sustainable growth rate.

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One minus the dividend payout ratio is the firm’s retention rate. The sustainable growth rate is the firm’s return on equity (ROE) times the retention rate.

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Which of the following statements concerning security valuation is least accurate?

A) Accounting methods may differ substantially between countries.

B) The business risk component of a country's risk premium is a function of the variability of economic activity in the country and the average operating leverage used by firms in the country.

C) If the return on new investments is less than the return the firm is earning on its existing investments, the firm is considered a growth firm.

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If the return on new investments is greater than the return the firm is earning on its existing investments, the firm is considered to be a growth firm.

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A company’s payout ratio is 0.45 and its expected return on equity (ROE) is 23%. What is the company’s implied growth rate in dividends?

A) 12.65%

B) 10.35%

C) 4.16%

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Growth Rate = (ROE)(1 – Payout Ratio) = (0.23)(0.55) = 12.65%

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A company’s required return on equity is 15% and its dividend payout ratio is 55%. If its return on equity (ROE) is 17% and its beta is 1.40, then its sustainable growth rate is closest to:

A) 7.65%

B) 6.75%

C) 9.35%

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Growth rate = (ROE)(Retention Ratio)

= (0.17)(0.45)

= 0.0765 or 7.65%

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If a firm’s growth rate is 12% and its dividend payout ratio is 30%, its current return on equity (ROE) is closest to:

A) 40.00%

B) 17.14%

C) 36.00%

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g = (RR)(ROE)

g / RR = ROE

0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or 17.14%

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A company with a return on equity (ROE) of 27%, required return on equity (k_e) of 20%, and a dividend payout ratio of 40% has an implied sustainable growth rate closest to:

A) 12.00%

B) 10.80%

C) 16.20%

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g = (RR)(ROE)

= (.60)(.27)

= 0.162 or 16.2%