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Homework answers / question archive / Most stocks trade at five to seven times their book values Which of the following statements concerning the dividends-and-earnings (D&E) approach to stock valuation are true? I

- Most stocks trade at five to seven times their book values
- Which of the following statements concerning the dividends-and-earnings (D&E) approach to stock valuation are true?

I. The D&E valuation method works just as well for non-dividend paying stocks as it does for dividend-paying stocks.

II. The current value of a stock using the D&E method is equal to the expected selling price of the stock plus the present value of the future dividends.

III. The D&E approach considers earnings per share and the price/earnings ratio.

IV. The D&E considers a finite investment period.

A) I and II only

B) III and IV only

C) I, III and IV only

D) I, II and III only - Commonly used multiples for determining a stock's value include

I. price to earnings.

II. price to sales.

III. price to cash flow.

IV. price to dividends.

A) I, II and III only

B) I, III and IV only

C) II, III and IV only

D) I, II III and IV - The single most important variable in the dividends-and-earnings approach is the

A) rate of growth.

B) applicable beta.

C) appropriate P/E multiple.

D) amount of the future dividends. - Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type. What price should you be willing to pay for this stock?

A) $12.50

B) $24.86

C) $43.48

D) $57.50 - Ivonne has bought shares of RIO, Inc. stock for $25.00 per share. She expects a 1.00 dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to sell the stock for $28.75. What is Ivonne's required rate of return?

A) 4.0%

B) 11.6%

C) 15.2%

D) 24.0% - An internal rate of return (IRR) is the discount rate that

A) represents the minimal rate required to create a positive net present value.

B) is the minimal rate of return an investor will accept.

C) provides an investor with their required return.

D) produces a present value of future benefits equal to the market price of a stock. - In the price/earnings approach to stock valuation,

A) historical stock prices are utilized.

B) forecasted EPS are typically used.

C) the P/E ratio is computed by multiplying the stock price by the earnings per share.

D) the market P/E ratio, adjusted by beta, is used to value individual stocks. - The dividends-and-earnings (D&E) approach to stock valuation and the variable-growth DVM approach are similar in that both approaches

A) are present-value based.

B) consider dividends only and ignore the future selling price of the stock.

C) consider the future selling price of the stock but ignore future dividends.

D) use the historical dividend growth rate as the key input figure. - The Mayan Calendar Co. intends to liquidate all of its assets at the end of 2012 and pay out the proceeds as one giant dividend of $1,000 per share. For an investor who required a 10% rate of return, the value of Mayan stock on January 1 2012 would have been

A) $1,100.

B) $1,000.

C) $909.09.

D) Such a stock would have no value at all.

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