SS 14 (chapters 49-51) Complete Exam Questions And Verified Answers Solution Graded A+.
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What contributes to high market stability? - correct answer - High barriers to entry
- high switching costs
When would valuing a stock's price by using the dividend discount model likely to be most appropriate? - correct answer ...
What contributes to high market stability? - correct answer - High barriers to entry
- high switching costs
When would valuing a stock's price by using the dividend discount model likely to be most appropriate?
- correct answer Mature business with steady growth
When using the dividend discount model to determine the value of an investment. Analysts often use
the CAPM to estimate: - correct answer required rate of return
Increasing the required rate of return would cause the P/E multiple to... (Rise? Fall? or Stay the same?) -
correct answer Fall
what is a disadvantage of using price-to-sales (P/S) multiples in stock valuations? - correct answer
Growth in sales may not necessarily mean a growth in profit.
What are advantages of using price-to-sales (P/S) multiples in stock valuations? - correct answer
The fact that earnings are more easily manipulated than sales, is an advantage of the P/S ratio. The fact
that price to sales ratios tend to be less volatile than P/E ratios is an advantage of the P/S ratio. P/S
multiples are more likely to be available for firms than the P/E ratio.
Dividend Yields - correct answer Stocks with a high dividend yield will usually have a
low earnings multiplier. A company that pays relatively large dividends will have a lower earnings
growth rate, resulting in a lower P/E ratio.
A disadvantage of the EV method for valuing equity is that the following information may be difficult to
obtain: - correct answer Market Value of Equity. According to the reading, analysts
may have not have access to market quotations for company debt.
All else equal, if a firm's return on equity (ROE) increases, the stock's value as estimated by the constant
growth dividend discount model (DDM) will most likely: - correct answer Increase in
, ROE: ROE is a component of g. As g increases, the spread between ke and g, or the P/E denominator, will
decrease, and the P/E ratio will increase.
Industry analysis is most likely to provide an analyst with insight about a company's: - correct answer
Pricing Power
Porter's five competitive forces - correct answer (1) rivalry among existing
competitors; (2) threat of entry; (3) threat of substitutes; (4) power of buyers; (5) power of suppliers.
If an analyst estimates the intrinsic value for a security that is different from its market value, the analyst
should most likely take an investment position based on this difference if: - correct answer
the model used is not highly sensitive to its input values. In general, an analyst can be more confident
about an estimate of intrinsic value if the model used is not highly sensitive to changes in its inputs. If a
large number of analysts follow a security, its market value is more likely to be a reliable estimate of its
intrinsic value. A security that does not trade frequently or in a liquid market may remain mispriced for
an extended time, and thus may not result in a profit within the investment horizon even if the analyst's
estimate of intrinsic value is correct.
One advantage to using the price/book value (P/B) ratio over using the price/earnings (P/E) ratio is that
P/B can be used when: - correct answer When earnings are negative, P/E ratios
cannot be used but P/B ratios can be used. The firm's rate of growth and the volatility of markets do not
suggest advantages of using P/B ratios rather than P/E ratios.
The price to book value ratio (P/BV) is a helpful valuation technique when examining firms: - correct
answer That hold primarily liquid assets.
Technological changes are most likely to result in which of the following effects? Evolving technology is
likely to result in changes in: - correct answer educational curriculum and the
relative demand for various products.
Preferred Stock - correct answer Fixed dividend and no maturity
cost leadership strategy. - correct answer An aggressive price reduction to gain
market share
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