Question

1)Check the correct statements.

Group of answer choices

a)If a security is underpriced, then the expected holding period return is above the market capitalization rate.

b)The value of the equity equals the present value of all future payouts (dividends plus repurchases).

c)The value of a share equals the present value of all future dividends per share.

d)If a firm reinvests its earnings at an ROE equal to the market capitalization rate, then its earnings-price (E/P) ratio is equal to the market capitalization rate.

e)The value of a share equals the present value of earnings per share assuming the firm does not grow, plus the NPV of all future investments.

2)Check the correct statements.

Group of answer choices

a)Everything else equal, the higher the expected dividend growth rate, the higher the P/E ratio.

b)Everything else equal, the higher the plowback ratio, the lower the P/E ratio.

c)Everything else equal, the higher the plowback ratio, the higher the P/E ratio.

d)Everything else equal, the higher the risk of the stock, the lower the P/E ratio.

e)Everything else equal, the higher the risk of the stock, the higher the P/E ratio.

Match the stock valuation model from the left column with the cash flows used in that model from the right column.

3) Group of answer choices

Total Payout Model

   word box: Dividends per share            Free Cash Flow to the Firm            Dividends plus buybacks      

Dividend Discount Model

word box: Dividends per share            Free Cash Flow to the Firm            Dividends plus buybacks      

DCF Model

word box: Dividends per share            Free Cash Flow to the Firm            Dividends plus buybacks      

4)

Match the stock valuation model from the left column with the discount rate used in that model from the right column.

Group of answer choices

Total Payout Model

word box: equity cost of capital            weighted-average cost of capital      

Dividend Discount Model

word box: equity cost of capital            weighted-average cost of capital      

DCF Model

word box: equity cost of capital            weighted-average cost of capital

Answer 1

In this question multiple question, we solved only 1st question as per guidelines.

1)

a) If the expected holding period return is above the market capitalization rate then the value of shares is overpriced. If the market capitalization rate is higher than the expected holding period then the value of security is underpriced.

b) The value of equity is always the present value of dividend payout and repurchase of share price

c) The value of shares is not equal to the present value of shares until the growth rate is not determined. The value of shares can be calculated by dividing the dividend by their discount rate and by their present value, if the equity does not repurchase at the end.

d) The return on equity as per ROE which is equal to market capitalization rate is not equal to P/E ratio because for ROE calculation we use book value of equity but for P/E ratio we use market value of shares.

e) The present value of earnings per share is not equal to the value of shares because we also need to consider the reinvestment of earning.

Hence, option (ii) is correct; so the value of equity is always the present value of dividend payout and repurchase of share price.