1. Which of the following is not considered in the price-earnings ratio technique?
a) Firm's required rate of return on equity (k)
b) Firm's dividend payout ratio (D/E)
c) Firm's expected growth rate of dividends (g)
d) All of the above are components of P/E ratio
e) None of the above are components of P/E ratio
2. Under the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is discounted at the firm's:
a) Weighted average cost of capital.
b) Cost of debt.
c) Internal rate of return.
d) External cost of new equity.
e) Net present value.
3. Which of the following is not a technique for valuing a firm's common stock?
a) Present value of free cash flow to equity
b) Present value of dividends
c) Price-earnings ratio
d) Price-book value ratios
e) Price-cost of goods sold ratio
4. A growth company can invest in projects that generate a return greater than the firm's _____________.
a) Return on equity.
b) Cost of debt.
c) Cost of equity.
d) Cost of capital.
e) Return on assets
5. Which of the following is correct?
a) If estimated value > Market price, you should buy.
b) If estimated value > Market price, you should sell.
c) If estimated value < Market price, you should sell.
d) If estimated value < Market price, you should buy.
e) Choices a and c
1. The price-earnings ratio technique values the company at a price which is some multiple of its earnings. Usually, the ratio used is based upon industry averages, past performance, or expected future performance. Answers a, b, and c are used in the Gordon Dividend Growth Model, not the Price-Earnings Ratio Model. Therefore, answer ...
This solution discusses and responds to five different topics in finance: (1) the various price/earnings ratio techniques, (2) the discount rate to use in net present value computations, (3) ways to value common stocks, (4) criteria for evaluating investments in projects, and (5) buy/sell criteria.