Question 91

Following is a graph of the Industry Life Cycle with the names of the phases omitted.

Using the graph above, which of the following choices is least accurate?

A)    The return on equity (ROE) on new projects is likely greater than ke for firms in Phase B.

B)   The infinite period dividend discount model (DDM) works well for valuing firms in Phases C and D.

C)   For most companies, Phase C lasts the longest.

D)   In general, profit margins are lower in Phase A than in Phase B.

To ensure the continuity of a value-weighted index when one of the stocks in the index is split:

A)    only the numerator must be adjusted for the split.

B)   no adjustment is necessary.

C)   only the denominator must be adjusted for the split.

D)   both the numerator and the denominator must be adjusted for the split.

Given the following assumptions about a company’s financial estimates:

• Earnings retention rate at 40%

• Required rate of return, k_e, of 12.5%

• Return on equity (ROE) of 11%, expected to remain constant

• Estimated earnings per share (EPS) for next year of $2.75

The company's estimated P/E ratio and share value are closest to:

       P/E Ratio     Share Value

A)    7.41               18.65

B)   7.41               20.40

C)   6.78               20.40

D)   6.78               18.65

Which of the following is least likely a component of an investor’s required rate of return on a stock?

A)    The real risk-free rate.

B)   The expected inflation rate.

C)   A risk premium.

D)   A growth premium.

Which of the following statements about price multiples is least accurate?

A)    The price/book value (P/BV) ratio is more useful for evaluating distressed firms than the price/sales (P/S) ratio.

B)   Firms with low price/book value (P/BV) ratios tend to outperform high P/BV ratio firms on a risk-adjusted basis.

C)   One advantage of the price/cash flow (P/CF) ratio is that cash flow figures are typically more stable than earnings figures.

D)   P/BV and price/cash flow (P/CF) ratios should be used in conjunction with price/earnings (P/E) ratios in fundamental analysis.

[此贴子已经被作者于2008-11-7 17:24:11编辑过]

答案和详解如下！

Question 91

Following is a graph of the Industry Life Cycle with the names of the phases omitted.

Using the graph above, which of the following choices is least accurate?

A)    The return on equity (ROE) on new projects is likely greater than ke for firms in Phase B.

B)   The infinite period dividend discount model (DDM) works well for valuing firms in Phases C and D.

C)   For most companies, Phase C lasts the longest.

D)   In general, profit margins are lower in Phase A than in Phase B.

The correct answer was C) For most companies, Phase C lasts the longest.

For most companies, Phase D, the Stabilization and Market Maturity Phase, lasts the longest. Phase C is the Mature Growth Phase.

The other statements are true. During Phase B, the Rapid Accelerating Growth Phase, it is likely that the firm is earning a higher return on new projects than the required rate of return. During this phase, investors likely prefer for the firm to reinvest rather than pay dividends. The infinite period DDM works well for valuing firms in Phase C, the Mature Growth Phase, and Phase D, the Stabilization and Market Maturity Phase. Remember that the infinite period DDM  is most useful for a company with the following assumptions:

• Company pays dividends,

• Dividends are expected to grow at constant rate,

• The growth rate continues indefinitely, and

• k_e > g.

Phase A, the Pioneering Phase, is the start-up phase. Here, the market is small and firms incur major development costs. Sales growth is low and profit margins may be negative. In Phase B, the Rapid Accelerating Growth Phase, markets develop and demand grows exponentially. Competition is low and sales growth and profit margins are very high.

This question tested from Session 14, Reading 58, LOS c

Question 92

To ensure the continuity of a value-weighted index when one of the stocks in the index is split:

A)    only the numerator must be adjusted for the split.

B)   no adjustment is necessary.

C)   only the denominator must be adjusted for the split.

D)   both the numerator and the denominator must be adjusted for the split.

The correct answer was B ) no adjustment is necessary.

A value-weighted index does not need to be adjusted for stock splits because the market capitalization of the company remains the same.

This question tested from Session 13, Reading 53, LOS a, (Part 1)

Question 93

Given the following assumptions about a company’s financial estimates:

• Earnings retention rate at 40%

• Required rate of return, k_e, of 12.5%

• Return on equity (ROE) of 11%, expected to remain constant

• Estimated earnings per share (EPS) for next year of $2.75

The company's estimated P/E ratio and share value are closest to:

       P/E Ratio     Share Value

A)    7.41               18.65

B)   7.41               20.40

C)   6.78               20.40

D)   6.78               18.65

The correct answer was B ) 7.41               20.40

1: Estimate the P/E ratio

• P/E ratio = Dividend Payout / (k_e – g)

• Here, Dividend Payout = (1 – retention rate) = 1 – 0.40 = 0.60

• g = retention rate × ROE = 0.40 × 0.11 = 0.044, or 4.4%

• P/E = 0.60 / (0.125 − 0.044) = 7.41

2: Calculate value

• P₀ = P/E × EPS = 7.41 × $2.75 = $20.378, or approximately $20.40.

This question tested from Session 14, Reading 59, LOS b

Question 94

Which of the following is least likely a component of an investor’s required rate of return on a stock?

A)    The real risk-free rate.

B)   The expected inflation rate.

C)   A risk premium.

D)   A growth premium.

The correct answer was D) A growth premium.

The required rate of return on a stock is composed of the real risk-free rate, a premium for the expected inflation rate, and a premium for risk.

This question tested from Session 14, Reading 60, LOS d, (Part 1)

Question 95

Which of the following statements about price multiples is least accurate?

A)    The price/book value (P/BV) ratio is more useful for evaluating distressed firms than the price/sales (P/S) ratio.

B)   Firms with low price/book value (P/BV) ratios tend to outperform high P/BV ratio firms on a risk-adjusted basis.

C)   One advantage of the price/cash flow (P/CF) ratio is that cash flow figures are typically more stable than earnings figures.

D)   P/BV and price/cash flow (P/CF) ratios should be used in conjunction with price/earnings (P/E) ratios in fundamental analysis.

The correct answer was A) The price/book value (P/BV) ratio is more useful for evaluating distressed firms than the price/sales (P/S) ratio.

The P/S ratio is more useful than P/BV for evaluating distressed firms because sales, unlike book value, cannot be negative.

Firms with low P/BV ratios tend to outperform high P/BV ratio firms on a risk-adjusted basis, cash flow figures are typically more stable than earnings figures, and P/BV and P/CF ratios should be used in conjunction with P/E ratios in fundamental analysis.

This question tested from Session 14, Reading 61, LOS a, (Part 1)

thanks a lot