1 . The current price ofXYZ, Inc., is $40 per share with 1,000 shares of equity outstanding. Sales are$4,000 and the book value of the firm is $10,000. What is the price/sales ratioof XYZ, Inc.?
A)10.000.
B)0.010.
C)4.000.
The correct answerwas: A
The price/sales ratiois (price per share)/(sales per share) = (40)/(4,000/1,000) = 10.0.Alternatively, the price/sales ratio may be thought of as the market value ofthe company divided by its sales, or (40 × 1,000)/4,000, or 10.0 again.
2 . A firm has an expecteddividend payout ratio of 50 percent, a required rate of return of 18 percent,and an expected dividend growth rate of 3 percent. The firm’s price to earningsratio (P/E) is:
A)6.66.
B)2.78.
C)3.33.
The correct answer wasC
P/E = .5 / (18%-3%) =3.33.
3 . Given thefollowing information, compute price/sales.
§ Book value of assets = $550,000.
§ Total sales = $200,000.
§ Net income = $20,000.
§ Dividend payout ratio = 30%.
§ Operating cash flow = $40,000.
§ Price per share = $100.
§ Shares outstanding = 1,000.
§ Book value of liabilities = $500,000.
A)2.50X.
B)0.50X.
C)2.00X.
The correct answer wasB
Market value of equity= ($100)(1000) = $100,000
Price / Sales =$100,000 / $200,000 = 0.5X
4 . Global depositoryreceipts are most likely issued:
A)outside the issuer’shome country and denominated in the exchange’s home currency.
B)in the United Statesand denominated in U.S. dollars.
C)outside the issuer’shome country and denominated in U.S. dollars.
The correct answer wasC
Global depositoryreceipts are issued outside the U.S. and the issuer’s home country and are mostoften denominated in U.S. dollars. Depository receipts issued in the UnitedStates and denominated in U.S. dollars are called American depository receipts.Global registered shares are denominated in the home currencies of theexchanges on which they trade.
5 . Which of thefollowing statements about the constant growth dividend discount model (DDM) inits application to investment analysis is least accurate? The model:
A)is best applied toyoung, rapidly growing firms.
B)can’t be appliedwhen g > K.
C)is inappropriate forfirms with variable dividend growth.
The correct answerwas: A
The model is mostappropriately used when the firm is mature, with a moderate growth rate, payinga constant stream of dividends. In order for the model to produce a finiteresult, the company’s growth rate must not exceed the required rate of return.
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