Quiz 1

Investments
BSC III, Section A
1What are three types of indexes used to indicate peaks and troughs of the business cycle? Write 2 examples for each
index.
2-Payout ratio has .. relationship with P/E ratio. (1)
3- If intrinsic value is greater than the market price, an investor will..buy/sell.. the stock because it is .
under/overvalued.. (2)
4-What is meant by technical and fundamentals analysis? (2)
5-What is meant by stock valuation? What three types of discount models that can be used to value a stock? (3)
6- What is the rationale behind constant growth model? (1)
True/False
A stock with low systematic risk is considered to be a defensive stock.
By definition growth companies have growth stocks.
In the present value of operating free cash flow technique, the firm's operating free cash flow to the firm is
discounted at the firm's weighted average cost of capital (WACC).
4.
Operating free cash flow and Free cash flow to equity are equivalent cash flow concepts.
5.
A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
1.
2.
3.

Numerical Section
1. USE THE FOLLOWING INFORMATION FOR THE NEXT TWO QUESTIONS
Wal-Blue
Industry
DPS
1.00
1.50
Total Asset Turnover 3.20
2.50
Net Profit Margin
3.50%
3.00%
EPS
4.00
3.00
Total Assets/Equity
3.00
4.00
a) What are the ROE's for Wal-Blue and its industry?
b) What are the expected sustainable growth rates for Wal-Blue and its industry?
2-a) The Peterson Company has FCFF 0 of $1000. FCFF is expected to grow by 12% next year. The cost of capital is 12%
and the level of debt is $5000. The number of shares outstanding is 500. Calculate the firms share price.
2-b) The Pekay Company has FCFE 0 of $800. FCFE is expected to grow by 7% next year. The cost of capital is 7% and
the level of debt is $4000. The number of shares outstanding is 700. Calculate the firms share price.
3)- Calculate the payout ratio of company ABC if required rate of return is 10%, P/E ratio is 5. The company is retaining
40% of the earnings and earning 12% on its equity. (5)
4)- If the current dividend of company XYZ is $1 and is expected to grow at a rate of 12% a year for 5 years, at the end of
which time the new growth rate is expected to be a constant 6% a year. The required rate of return is 10%. Calculate the
intrinsic value of the stock? (5)

(a)
(b)

5)- Contemporary Casuals, Inc., (CCI) is 15% more risky than the market, an expected dividend of $2.30, and an
expected dividend growth rate of 5 percent for the foreseeable future. The S&P500 expected return is 18 percent,
and the Treasury bill rate is 6 percent. (10)
Calculate the required return on Contemporary stock.
Calculate the price of Contemporary stock.