Question 7 Using the constant-growth DCF (discounted cashflow) formula, the Price-to-Book ratio can be expressed where BVPS is the book value per share, ROE is the return on equity, r is the capitalization rate and b is the plowback ratio. Which of the following statement is CORRECT?

A. When ROE > r, the Price-to-Book ratio (P0/BVPS) is larger than 1.

B. The Price-to-Book ratio (P0/BVPS) increases as ROE declines.

C. When ROE < r, the Price-to-Book ratio (P0/BVPS) is equal to 1.

D. When ROE = r, the Price-to-Book ratio (P0/BVPS) is smaller than 1.

Question 10 J&J Co. just paid a dividend of $2 per share out of earnings of $4 per share. If the book value per share is $25, and its market price is $21.60 per share, calculate the required rate of return on the stock.

A. 17.26%

B. 16.64%

C. 18.00%

D. 8.00%

Question 11 Which of the following is TRUE?

A. Assuming a firm's dividend is expected to grow at the constant rate, one can estimate the expected rate of return of the common stock (or the cost of equity capital or the capitalization rate) as: Expected Dividend yield (i.e., D1/P0) + expected rate of growth in dividends.

B. The constant dividend growth formula P0 = Div1/(r - g) assumes g is never negative.

C. One can estimate the sustainable dividend growth rate for a stable firm as: plow-back rate/the return on equity (ROE).

D. By EPS1/P0 = r x(1-PVGO/P0) where P0 is the currenct share price, EPS1 equals the average future earnings the firm could generate under no-growth policy, r is the capitalization rate, and PVGO is the present value of the growth opportunity, we have that EPS1/P0 is larger than the capitalization rate if there is no growth opportunity for the firm.

Question 12 Truce Company has a P/E ratio of 15 and a stock price of $60 per share. Calculate earnings per share of the company.

$15 per share

$9 per share

$4 per share

$0.25 per share