Quiz : Equity Valuation Models Nico Gilbert Nathaniel Siagian 217007056
Magister Manajemen Eksekutif 30 SPS USU
1. IN what circumstances would you choose to use Dividend Discount Model rather than a Free Cash Flow Model to value a firm ?
The dividend discount model and the free cash flow model to value a firm are absolute valuation methods. These models attempt to value a firm by discounting the future cash flows occurring to a firm at a required rate of return. These future cash flows are generally in the form of dividend and capital gain at the time of selling the stock.
2. If a security is underpriced ( i.e, Intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?
If intrinsic value = price, the market capitalization = expected rate of return.
If intrinsic value > Price, the market capitalization rate > expected rate of return
3. Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 11.50 percent at the time of your purchase?
P1=2.8*(1+4%)^2/(11.5%-4%)=40.38
Multiple Choice
1.Equity capital can be raised through (a)the money market.
(b)the NYSE bond market.
(c)retained earnings and the stock market.
(d)a private placement with an insurance company as the creditor.
2. As a form of financing, equity capital (a)has a maturity date.
(b)is only liquidated in bankruptcy.
(c)is temporary.
(d)has priority over bonds.
3. The claims of the equity holders on income have priority over (a)the claims of the preferred stockholders.
(b)the claims of the creditors.
(c)the claims of the unsecured creditors.
(d)no one.
4. The opportunity for management to purchase a certain number of shares of their firm’s common stock at a specified price over a certain period of time is a
(a)stock option.
(b)warrant.
(c)pre-emptive right.
(d)stock right.
5. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a
required return of 10 percent. The value of a share of the firm’s common stock is _________.
(a)$120 (b)$10 (c)$12 (d) $100
6. Amy, co. has an expected dividend next year of $5.60 per share, a growth rate of dividends of
10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.’s common stock is _________.
(a)$28.00 (b)$56.00 (c)$22.40 (d)$18.67
7. You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X _____.
A. will be greater than the intrinsic value of stock Y B. will be the same as the intrinsic value of stock Y C. will be less than the intrinsic value of stock Y
D. will be greater than the intrinsic value of stock Y or will be the same as the intrinsic value of stock Y
E. None of these is correct.
