Over the last year, a firm's earnings per share increased from $1

1. Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24. The firm maintained a relative P/E of 1.10 over the entire time period. Given this information, it follows that the
   A) stock experienced an increase in its P/E ratio.
   B) company had a decrease in its dividend payout ratio.
   C) current P/E of the overall market is 26.4.
   D) overall market P/E is declining.

D

2. Which of the following will lead to an increase in earnings per share?
   A) an increase in the P/E ratio.
   B) an increase in the dividend payout ratio.
   C) an increase in return on equity if book value per share stays the same.
   D) a decrease in the number of shares if return on equity stays the same.

C

3. 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?
   A) $9.65
   B) $14.47
   C) $24.12
   D) $33.77

C

4. The common stock of Jennifer's Furniture Outlet is currently selling at $32.60 a share. The company adheres to a 60% dividend payout ratio and has a P/E ratio of 19. There are 21,000 shares of stock outstanding. What is the amount of the annual net income for the firm?
   A) $21,619
   B) $36,032
   C) $48,327
   D) $60,053

B

5. Risk is brought into the stock valuation process through the required rate of return.

TRUE

6. A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.

FALSE

7. There is no assurance that the actual rate of return on an asset will be similar to the projected rate of return.

TRUE

8. The greater the perceived risk of an asset, the lower the expected rate of return.

FALSE

9. Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model.

TRUE

10. The required rate of return denotes the minimum rate of return an investor should expect.

TRUE