Quiz on Asset Valuation

What is the value of a financial asset based on?

• Its market price

• Its book value

• The present value of expected future cash flows

• The liquidation value

Which of the following is true about shareholders?

• Shareholders have unlimited liability.

• Shareholders are obligated to receive dividends annually.

• Shareholders represent residual claimants in liquidation.

• Shareholders cannot vote for the board of directors.

What is the difference between the primary and secondary stock markets?

• The primary market involves only bonds.

• In the primary market, securities are traded among investors.

• The primary market is where corporations issue new securities.

• The secondary market is used for initial public offerings (IPOs).

The DDM is most suitable for valuing stocks with:

• Infinite growth in dividends.

• Predictable future dividend payments.

• No dividend payments.

• Declining future dividends.

If the intrinsic value of a stock is higher than its market price, the stock is considered:

• Overvalued

• Undervalued

• Fairly priced

• Untradable

Which of the following ratios is NOT typically used in valuation by comparables?

• Price/Earnings

• Price/Book Value

• Price/Sales

• Free Cash Flow to Equity

What does Free Cash Flow (FCF) represent?

• Cash flow after dividends are paid.

• Cash flow available after capital investments and working capital requirements.

• The firm's total net profit.

• The firm's operating revenue.

What happens to the price of a bond when interest rates increase?

• The price increases.

• The price decreases.

• The price remains unchanged.

• The price is determined by the coupon rate alone.

The sustainable growth rate of a firm depends on:

• Its dividend payout ratio and ROE.

• Its market value and book value.

• Its liquidation value and debt ratio.

• Its capital structure and market interest rates.

In the constant-growth DDM, the stock price is most sensitive to changes in:

• The dividend growth rate and required return.

• The current market price.

• The firm's debt ratio.

• The book value of the stock.