CSC Equity Securities Valuation 2

Question 1

A stock trades at $50 with earnings per share of $4. What is its price-to-earnings (P/E) ratio?

Accepted Answer

12.5

Answer

P/E = Price ÷ EPS = $50 ÷ $4 = 12.5.

Question 2

Which valuation approach estimates a stock's worth based on the present value of expected future dividends?

Accepted Answer

Dividend discount model

Answer

The dividend discount model (DDM) values a stock as the present value of all anticipated future dividends.

Question 3

In the Gordon Growth Model, if the required return is 10% and the dividend growth rate is 4%, what is the dividend yield implied?

Accepted Answer

6%

Answer

Dividend yield = Required return − Growth rate = 10% − 4% = 6%.

Question 4

A company has a book value per share of $25 and trades at $75. What is its price-to-book (P/B) ratio?

Accepted Answer

3.0

Answer

P/B = Market price ÷ Book value per share = $75 ÷ $25 = 3.0.

Question 5

Which scenario would most likely lead an analyst to assign a higher P/E multiple to a stock?

Accepted Answer

Strong earnings growth prospects and low risk

Answer

Stocks with strong growth prospects and lower risk warrant higher P/E multiples because investors pay more for each dollar of earnings.

CSC - Canadian Securities Course Practice Test