The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate

1. The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.

TRUE

2. The intrinsic value of a stock provides a purchase price for the stock
   A) that is reasonable given the associated level of risk.
   B) which will assuredly yield the anticipated capital gain.
   C) which will guarantee the expected rate of return.
   D) that is always below the market value but yet yields the expected rate of return.

A

3. The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return?
   A) 8.80%
   B) 12.05%
   C) 13.20%
   D) 14.30%

B

4. The risk free rate is 2%. The expected rate of return on the market is 12%. Beta and the expected rate of return for four stocks are as follows.: ABC .8 , 10%; DEF 1, 12%; GHI 1.2 , 13%, and JKL 2, 22%. Which of these stocks should not be purchased?
   A) ABC
   B) DEF
   C) GHI
   D) JKL

C

5. Which of the following are key inputs to determining the value of an asset?
   I. the required rate of return
   II. future cash flows
   III. current stock price
   IV. timing of future cash flows
   A) I and II only
   B) I and III only
   C) I, II and IV only
   D) II, III and IV only

C

6. In the Capital Asset Pricing Model, which of the following factors are used to determine the required rate of return?
   I. the risk-free interest rate
   II. future cash flows
   III. expected return on the market portfolio
   IV. beta
   A) I and II only
   B) I, II and III only
   C) II, III and IV only
   D) I, III and IV only

D

7. Which of the following characteristics appeal to so-called value investors?
   I. high P/E ratios.
   II. low debt to equity ratios
   III. high cash flow relative to price
   IV. high book value relative to market price
   A) I and II only
   B) I and III only
   C) I, II and IV only
   D) II, III and IV only

D

8. An investor should purchase a stock when
   A) the market price exceeds the intrinsic value.
   B) the expected rate of return equals or exceeds the required return.
   C) the capital gains rate is less than the required return and no dividends are paid.
   D) the market price is greater than the justified price.

B

9. William is the type of stock market investor who focuses on factors such as a company's book value, debt load, return on equity, and cash flow. In searching for stock investments, he looks at a company's historical performance and attempts to find undervalued stocks. This information indicates that Sam is the type of investor known as
   A) a growth investor.
   B) a premium investor.
   C) an earnings investor.
   D) a value investor.

D

10. Stephanie is an investor who believes that the real key to a company's future stock price lies in its future earnings. When investing in a company, she carefully studies its future earnings potential, and sells a company's stock at the first sign of any trouble. This information indicates that Della would correctly be classified as
    A) a growth investor.
    B) a value investor.
    C) a buy-and-hold investor.
    D) an index investor.

A