MULTIPLE CHOICE. Choose the one alternative that best completes the statement or
ID: 2650003 • Letter: M
Question
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
25) An aggressive growth mutual fund is least likely to purchase a stock 25) ______
A) with a high anticipated rate of growth. B) of an unseasoned firm.
C) with a high dividend yield. D) with a high P/E ratio.
26) The single most important issue in the stock valuation process is a company's 26) ______
A) expected future returns. B) capital structure.
C) past earnings record. D) historic dividend growth rate.
27) Which of the following contributes to high P/E ratios? 27) ______
A) high debt ratios B) high rate of earnings growth
C) periods of high inflation D) high dividend payout ratios
28) The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%. Sales are
expected to increase by 5% annually while the profit margin is expected to remain constant. What
is the projected after-tax earnings for two years from now?
28) ______
A) $23,153 B) $19,294 C) $23,100 D) $22,050
29) If the market multiple is 23.0 and the P/E ratio of a company is 27.4, then the stock's relative P/E is 29) ______
A) 4.40. B) 3.21. C) 1.19. D) 0.84.
30) P/E ratios could rise even as earnings fall if 30) ______
A) investors expect lower stock prices to be permanent.
B) investors expect lower earnings to be permanent.
C) earnings fall at a faster rate than stock prices.
D) earnings fall at a slower rate than stock prices.
31) Which one of the following is a correct equation to calculate earnings per share? 31) ______
A) (profit margin)(equity multiplier)(book value per share)
B) (profit margin)(total asset turnover)(equity multiplier)(book value per share)
C) (profit margin)(book value per share)
D) (ROA)(book value per share)
32) Global Warning's EPS for the current year is $2.75 and its current P/E ratio is 50. You have
forecasted that EPS will grow by 10% but the P/E ratio will fall to 40. What do you expect the
price of a share of GW's stock to be at the end of next year?
32) ______
A) $121 B) $137.50 C) $110 D) $151.25
33) Markhem Enterprises is expected to earn $1.34 per share this year. The company has a dividend
payout ratio of 40% and a P/E ratio of 18. What should one share of common stock in Markhem Enterprises be selling for in the market?33) ______
A) $33.77 B) $9.65 C) $24.12 D) $14.47
34) The intrinsic value of a stock provides a purchase price for the stock 34) ______
A) which will assuredly yield the anticipated capital gain.
B) which will guarantee the expected rate of return.
C) that is always below the market value but yet yields the expected rate of return.
D) that is reasonable given the associated level of risk.
35) The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return?
35) ______
A) 13.20% B) 14.30% C) 8.80% D) 12.05%
Explanation / Answer
27) High Growth of earnings contributes to high pe ratio because the earning increases therefore the pe ratio will definitely increase.
28)Sales= $ 350000 Profit Margin 6% Profit=21000
Expected Sales= 350000*105%=367500 Profit=367500*6%=22050
The correct answer is D) $ 22050
29) market Multiple=23
MPS/EPS=27.4
Relative PE=Stock PE/Market Multiple= 27.4/23 =1.19
The correct Answer is C) 1.19
30)D) earnings fall at a slower rate than stock prices
if earning decreases much faster than the market price of the stock the pe ratio will be high
32) EPS=2.75 MPS/EPS=50
New EPS=2.75*110%=3.025 MPS/3.025=50 MPS= $ 151.25
The correct Answer is D) $ 151.25
33) Dividend payout Ratio=dividend/income=.4
MPS/EPS=18 MPS/1.34=18 MPS=24.12
The correct Answer is C0 $ 24.12
35. Expected Return= Rf+B(Market Rate-Risk Free Rate)
=2.2+1.12(11-2.2)
=12.05%
The correct answer is D)
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