Chapter 18 - Equity Valuation Models
Chapter 18
Equity Valuation Models
Miroslav Mateev, Ph.D.
Full-time Professor in
Business (Finance)
Multiple Choice Questions
1. ________ is equal to the total market value of the firm's common stock divided by (the
replacement cost of the firm's assets less liabilities).
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. None of the above.
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.
A. grow quickly
B. grow at the same speed as the average company
C. grow slowly
D. not grow
E. none of the above
Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor
should be sure that he or she is paying for expected, not historic, growth.
Difficulty: Easy
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,Chapter 18 - Equity Valuation Models
3. _________ is equal to (common shareholders' equity/common shares outstanding).
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. none of the above
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
4. ________ are analysts who use information concerning current and prospective
profitability of a firms to assess the firm's fair market value.
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
E. Specialists
Fundamentalists use all public information in an attempt to value stock (while hoping to
identify undervalued securities).
Difficulty: Easy
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,Chapter 18 - Equity Valuation Models
5. The _______ is defined as the present value of all cash proceeds to the investor in the
stock.
A. dividend payout ratio
B. intrinsic value
C. market capitalization rate
D. plowback ratio
E. none of the above
The cash flows from the stock discounted at the appropriate rate, based on the perceived
riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic
value of the stock.
Difficulty: Easy
6. _______ is the amount of money per common share that could be realized by breaking up
the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. None of the above
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
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, Chapter 18 - Equity Valuation Models
7. Since 1955, Treasury bond yields and earnings yields on stocks were _______.
A. identical
B. negatively correlated
C. positively correlated
D. uncorrelated
The earnings yield on stocks equals the expected real rate of return on the stock market, which
should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may
change slowly over time. The yields are plotted in Figure 18.8.
Difficulty: Easy
8. Historically, P/E ratios have tended to be _________.
A. higher when inflation has been high
B. lower when inflation has been high
C. uncorrelated with inflation rates but correlated with other macroeconomic variables
D. uncorrelated with any macroeconomic variables including inflation rates
E. none of the above
P/E ratios have tended to be lower when inflation has been high, reflecting the market's
assessment that earnings in these periods are of "lower quality", i.e., artificially distorted by
inflation, and warranting lower P/E ratios.
Difficulty: Easy
9. The ______ is a common term for the market consensus value of the required return on a
stock.
A. dividend payout ratio
B. intrinsic value
C. market capitalization rate
D. plowback rate
E. none of the above
The market capitalization rate, which consists of the risk-free rate, the systematic risk of the
stock and the market risk premium, is the rate at which a stock's cash flows are discounted in
order to determine intrinsic value.
Difficulty: Easy
18-4
Chapter 18
Equity Valuation Models
Miroslav Mateev, Ph.D.
Full-time Professor in
Business (Finance)
Multiple Choice Questions
1. ________ is equal to the total market value of the firm's common stock divided by (the
replacement cost of the firm's assets less liabilities).
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. None of the above.
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.
A. grow quickly
B. grow at the same speed as the average company
C. grow slowly
D. not grow
E. none of the above
Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor
should be sure that he or she is paying for expected, not historic, growth.
Difficulty: Easy
18-1
,Chapter 18 - Equity Valuation Models
3. _________ is equal to (common shareholders' equity/common shares outstanding).
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. none of the above
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
4. ________ are analysts who use information concerning current and prospective
profitability of a firms to assess the firm's fair market value.
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
E. Specialists
Fundamentalists use all public information in an attempt to value stock (while hoping to
identify undervalued securities).
Difficulty: Easy
18-2
,Chapter 18 - Equity Valuation Models
5. The _______ is defined as the present value of all cash proceeds to the investor in the
stock.
A. dividend payout ratio
B. intrinsic value
C. market capitalization rate
D. plowback ratio
E. none of the above
The cash flows from the stock discounted at the appropriate rate, based on the perceived
riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic
value of the stock.
Difficulty: Easy
6. _______ is the amount of money per common share that could be realized by breaking up
the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
E. None of the above
Book value per share is assets minus liabilities divided by number of shares. Liquidation
value per share is the amount a shareholder would receive in the event of bankruptcy. Market
value per share is the market price of the stock.
Difficulty: Easy
18-3
, Chapter 18 - Equity Valuation Models
7. Since 1955, Treasury bond yields and earnings yields on stocks were _______.
A. identical
B. negatively correlated
C. positively correlated
D. uncorrelated
The earnings yield on stocks equals the expected real rate of return on the stock market, which
should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may
change slowly over time. The yields are plotted in Figure 18.8.
Difficulty: Easy
8. Historically, P/E ratios have tended to be _________.
A. higher when inflation has been high
B. lower when inflation has been high
C. uncorrelated with inflation rates but correlated with other macroeconomic variables
D. uncorrelated with any macroeconomic variables including inflation rates
E. none of the above
P/E ratios have tended to be lower when inflation has been high, reflecting the market's
assessment that earnings in these periods are of "lower quality", i.e., artificially distorted by
inflation, and warranting lower P/E ratios.
Difficulty: Easy
9. The ______ is a common term for the market consensus value of the required return on a
stock.
A. dividend payout ratio
B. intrinsic value
C. market capitalization rate
D. plowback rate
E. none of the above
The market capitalization rate, which consists of the risk-free rate, the systematic risk of the
stock and the market risk premium, is the rate at which a stock's cash flows are discounted in
order to determine intrinsic value.
Difficulty: Easy
18-4
