Reading 38: Equity Valuation: Concepts and Basic Tools

An analyst estimates a stock's intrinsic value to be $40 while its market price is $35. If the analyst is confident in their model and inputs, they would most likely conclude the stock is:

Which of the following is considered a multiplier model of equity valuation?

A dividend paid out in the form of new shares of stock rather than cash is known as a:

Which of the following corporate actions results in a reduction in the number of shares outstanding and an increase in the stock price, leaving shareholder wealth unchanged?

The first day on which a share purchaser will not receive the next dividend is called the:

A stock typically trades without the right to the next dividend starting on the:

If an investor buys a share one day before the ex-dividend date, they will:

Calculate the value of a stock that paid a $2.00 dividend last year, if next year's dividend is expected to be 5 percent higher and the stock is expected to sell for $45.00 at year-end. The required return is 10 percent.

The Gordon (constant) growth model is most appropriate for valuing companies that:

Using the Gordon growth model, calculate the value of a stock that just paid a dividend of $1.50, if the long-term growth rate is 4 percent and the required return is 9 percent.

If a firm's required return on equity (k) is less than its dividend growth rate (g), the Gordon growth model:

What is the intrinsic value of a preferred stock paying a fixed annual dividend of $4.50 if the required rate of return is 6 percent?

The sustainable growth rate of dividends is best estimated as:

Green, Inc. has a return on equity (ROE) of 15 percent and pays out 40 percent of its earnings as dividends. What is its sustainable growth rate?

A firm is expected to grow at a rate of 20 percent for 3 years and then 5 percent thereafter. Which valuation model is most appropriate?

Free Cash Flow to Equity (FCFE) is defined as the cash flow available to the firm's common equity holders after meeting:

Valuation using FCFE is preferred over DDM when a firm:

The price-to-earnings (P/E) ratio calculated using next year's expected earnings is known as the:

According to the Gordon growth model, the justified leading P/E ratio is equal to:

Other things equal, a firm with a higher dividend payout ratio will have a:

The law of one price suggests that two comparable assets should have:

Which price multiple is preferred for analyzing firms with negative earnings?

Enterprise Value (EV) is calculated as the market value of common and preferred stock plus the market value of debt minus:

Which of the following is a key advantage of using EBITDA in the Enterprise Value multiple (EV/EBITDA)?

Asset-based valuation models estimate the intrinsic value of common stock as:

Asset-based models are most reliable for valuing firms that:

In the context of valuation, a 'floor value' is often provided by:

A primary disadvantage of price multiples based on comparables is that:

The ratio of stock price to book value of equity per share is the:

Firms with low price-to-book ratios are typically considered:

Which valuation model category is best grounded in finance theory?

A major disadvantage of discounted cash flow models is that:

When calculating the P/E ratio for a cyclical firm during a recession, the ratio may be misleadingly high due to:

Calculate the Enterprise Value (EV) for a firm with a market capitalization of $100 million, market value of debt of $30 million, and cash of $5 million.

The declaration date is the date on which:

A share repurchase has the same effect on shareholder wealth as a:

Assume a stock price of $50. A 2-for-1 stock split will result in a new price of:

In a multistage dividend discount model, the terminal value represents:

A firm has a justified leading P/E of 10. If the expected earnings next year are $2.00, the intrinsic value of the stock is:

Which of the following inputs generally has the largest impact on the Gordon growth model valuation?

A firm has Net Income of $5M, Depreciation of $2M, Capital Expenditures of $3M, and an Increase in Working Capital of $1M. Assuming no debt changes, the Free Cash Flow to Equity (FCFE) is:

Analysts often use Enterprise Value (EV) multiples rather than P/E multiples when comparing firms with significant differences in:

The Price-to-Cash Flow (P/CF) ratio is calculated by dividing stock price by:

Using a peer group median P/E of 15 and a company's expected earnings per share of $3.00, the estimated stock value is:

A key assumption of the Gordon growth model is that:

For a firm paying no dividends currently but expected to start in 5 years, the analyst must first estimate:

One advantage of asset-based valuation models is that they:

In the method of comparables, the 'Law of One Price' implies that:

If a firm has a retention rate of 0 percent, its sustainable growth rate is:

Which valuation model is most appropriate for a firm in financial distress?