Stock Valuation Techniques
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Questions and Answers

What type of shares are the zero-growth model useful for valuing?

  • Preferred shares (correct)
  • Bonds
  • Common shares
  • Warrants

    • What is the required rate of return for Investor CDE in the zero-growth model illustration?

  • 12%
  • 15% (correct)
  • 20%
  • 10%

    • What is the primary focus of share valuation techniques?

  • Identifying the cash flow an investor can receive in the future (correct)
  • Determining the market value of a share
  • Projecting the profitability of a company
  • Analyzing the financial statements of a company

    • What is the assumption about the growth rate in the constant growth model?

    <p>It is assumed to be lower than the required rate of return</p> Signup and view all the answers

    What is the name of the model also known as the constant growth model?

    <p>Gordon Growth Model</p> Signup and view all the answers

    What is the period valuation model used for?

    <p>Calculating the present value of future cash flows</p> Signup and view all the answers

    When is the first dividend assumed to be received in the constant growth model?

    <p>Right away</p> Signup and view all the answers

    What is the discounted cash flow approach based on?

    <p>The present value of future cash flows</p> Signup and view all the answers

    What is the expected dividend growth rate for Bavarian Sausage in the constant growth model illustration?

    <p>5%</p> Signup and view all the answers

    What is the required rate of return on ordinary shares used for in the period valuation model?

    <p>To calculate the present value of future cash flows</p> Signup and view all the answers

    What is the dividend-based valuation technique used for?

    <p>Valuing shares based on dividend payments</p> Signup and view all the answers

    What is the value of the shares of Flix Company based on BSA PA's computation?

    <p>Php 30 per share</p> Signup and view all the answers

    What is the dividend per share for the year 2021?

    <p>2.80</p> Signup and view all the answers

    What is the limitation of the zero-growth and constant growth model?

    <p>It is not flexible in terms of growth rate expectations.</p> Signup and view all the answers

    What is the fourth step in the variable growth model?

    <p>Add the computed present value of the expected dividends and present value of the stock at the end of the initial growth period.</p> Signup and view all the answers

    What is the expected dividend growth rate of Vin Company in the next 3 years?

    <p>5%</p> Signup and view all the answers

    What is the purpose of the price-earnings ratio?

    <p>To show the amount that investors are willing to pay for each peso of earnings.</p> Signup and view all the answers

    What is the required return used by Vic in evaluating his investments?

    <p>12%</p> Signup and view all the answers

    What is the price of the stock today if the required return on investment is 14%?

    <p>$27.82</p> Signup and view all the answers

    What is the implied dividend growth rate for Bavarian Sausage if the stock sells for $34.37?

    <p>5%</p> Signup and view all the answers

    If the cost of capital is 10% and the dividend is expected to grow at 3% indefinitely, what is the price of the firm's stock 4 years from today?

    <p>$90.49</p> Signup and view all the answers

    If the required return on the stock investment is 14%, what should be the price of the stock in 5 years?

    <p>$39.19</p> Signup and view all the answers

    What is the dividend payment expected next year for Bavarian Sausage?

    <p>$1.57</p> Signup and view all the answers

    What is the expected dividend growth rate for Bavarian Sausage?

    <p>5%</p> Signup and view all the answers

    What is the primary purpose of using the average P/E ratio of an industry?

    <p>To compare the company's value with that of its peers</p> Signup and view all the answers

    A high P/E ratio may indicate that the market expects:

    <p>An increase in the company's earnings in the future</p> Signup and view all the answers

    What is a limitation of share valuation models?

    <p>They do not consider the company's risk profile</p> Signup and view all the answers

    What happens when companies assume more risks?

    <p>Shareholders expect higher dividends</p> Signup and view all the answers

    What should investors be wary of when using valuation models?

    <p>That all inputs are based on estimates</p> Signup and view all the answers

    What is the formula for calculating the price-to-earnings ratio?

    <p>Stock market price / earnings per share</p> Signup and view all the answers

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