5 Multiple choice questions to answer -

Question 1. Which one of the following statements is most likely correct regarding sustainable growth?

1. A share split will increase the sustainable growth rate.

2. A decrease in the debt ratio will increase the sustainable growth rate.

3. A decrease in the quarterly dividends will increase the sustainable growth rate.

Question 2. Which of the following statements regarding the P/E to growth (PEG) valuation approach is the least accurate? The PEG valuation approach assumes that:

1. there are no risk differences among stocks.

2. there is a linear relationship between price to earnings P/E and growth.

3. stocks with higher PEGs are more attractive than stocks with lower PEGs.

Question 3. Digby Limited has a net profit margin of 26% and a financial leverage of 1.25. The sales of its products amount to $182 000 while its total assets amount to R260 000. The firm has a dividend payout of 40%. Therefore, the sustainable growth rate of Digby Limited is:

1. 9.10%.

2. 13.65%.

3. 17.54%.

Question 4. Which of the following statements is the most accurate about the effect of a decrease in leverage on a firm's free cash flow to equity (FCFE)?

1. FCFE is unaffected by changes in leverage.

2. Current year FCFE increases, but future FCFE will be reduced.

3. Current year FCFE decreases but future FCFE will be increased.

Question 5. Keys Limited announced total liabilities of $800 million and total assets of $1200 million at the end of 2019. Keys Limited has 40 million shares outstanding, return on equity (ROE) of 15.50% and dividend payout of 50%. The firm's required rate of return is 9.20% and its market price is $74.17. Using a single-stage residual income model, Keys shares are most likely:

1. overpriced.

2. fairly priced.

3. underpriced.