Practice Questions for Final Exam
FIR 3710
Fall 2003
1. If a firm issues no new equity, book value will _______________________.
A) decrease each year by the amount of retained earnings
B) decrease each year by the amount of retained earnings minus depreciation on fixed
assets
C) increase each year by the amount of retained earnings
D) increase each year by the amount of retained earnings plus depreciation on fixed
assets
2. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is
__________.
A) 8.40
B) 11.90
C) 17.62
D) 47.60
3. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The
expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm
has a plowback ratio of 60%, its growth rate of dividends should be __________.
A) 2.5%
B) 4.0%
C) 8.4%
D) 10.8%
4. Riskier firms tend to have P/E ratios that are _________ the P/E ratios of less risky firms.
A) higher than
B) equal to
C) lower than
D) There is not necessarily any linkage between risk and P/E ratios
5. __________ is equal to (common shareholders' equity/common shares outstanding).
A) book value per share
B) liquidation value per share
C) market value per share
D) Tobin's Q
6. Assuming all other factors remain unchanged, __________ would increase a firm's price/
earnings ratio.
A) an increase in the dividend payout ratio
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