Quiz on Stock Valuation

Prepared by: Group 3

Identification. __________1. The formula that is most applicable to the valuation of the ordinary share of very large or broadly diversified firms. __________2. An approach of common stock valuation that is sophisticated but less reliable because it is based on historical balance sheet. __________3. It is the money provided by investors to startup firms and small businesses with perceived long-term growth potential. __________4. Financial instruments that permit stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares. __________5. The simplest approach to dividend valuation that assumes a constant, nongrowing dividend stream is called _____. Multiple Choice. ___6. Issued when the firm wishes to raise capital through the sale of common stock but does not want to give up its voting control. a) Supervoting shares c) Treasury stock b) Voting common stock d) Nonvoting common stock ___7. The estimated amount of money that could be received quickly through the sale of an asset or a company. a) Liquidation Value c) Stock Valuation b) Book Value d) Earnings per share ___8. It is the first sale of stock by a private company to the public. a) Rights offering c) Private Placement b) Initial public offering d) Authorization of shares ___9. What is the third step in determining the common stock using the Free Cash Flow Valuation Model? a) Calculating the value of the common stock b) Find the sum of the present values of the FCFs to determine the value of the entire company, VC c) Calculate the present value of the free cash flow occurring from the end of the given last year to infinity. d) None of the above ___10. The number of shares of common stock held by the public. a) Treasury Shares c) Outstanding shares b) Authorized shares d) Issued shares Problem. 11. 15. Perry Motors common stock just paid its annual dividend of P1.80 per share. The required return on the common stock is 12%. Estimate the value of the common stock if: a) Dividends are expected to grow at an annual rate of 0% to infinity. b) Dividends are expected to grow at a constant annual rate of 5% to infinity.

Answer Key:
Identification. 1. Gordons Valuation Model / Gordon Model / Constant-Growth Model 2. Book Value per Share 3. Venture Capital 4. Rights / Stock Rights 5. Zero-Growth Model Multiple Choice. 6. D 7. A 8. B 9. B 10. C Problem. 11. 15.

a.

Zero-growth:

P0 =
b.

= P15/share

Constant growth, g = 5%:

D1 = D0 * (1 + g) = P1.80 = (1 + 0.05) = P1.89/share P0 =

= = = P27/share