18 Lecture - Common stock - rate of return & EPS pricing model

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18 Lecture

MGT201

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Common stock - rate of return & EPS pricing model

The common stock - rate of return and EPS pricing model is a method used to estimate the fair value of a stock based on its expected earnings per share (EPS) and the investor's required rate of return. The model assumes that the fair value of a


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  1. What is the common stock - rate of return and EPS pricing model used for? A. To estimate the fair value of a stock B. To calculate the company's net income C. To measure the company's liquidity Answer: A

  2. The EPS in the common stock - rate of return and EPS pricing model stands for: A. Earnings Per Stock B. Expected Price Stability C. Earnings Per Share Answer: C

  3. The required rate of return in the common stock - rate of return and EPS pricing model represents: A. The investor's expected rate of return on the stock B. The company's cost of equity C. The company's net income Answer: A

  4. The fair value of a stock in the common stock - rate of return and EPS pricing model is calculated by: A. Dividing the expected EPS by the required rate of return B. Multiplying the expected EPS by the required rate of return C. Subtracting the expected EPS from the required rate of return Answer: A

  5. The expected growth rate in the common stock - rate of return and EPS pricing model represents: A. The expected rate of increase in the company's net income B. The expected rate of increase in the company's stock price C. The expected rate of increase in the company's dividends Answer: A

  6. The common stock - rate of return and EPS pricing model assumes: A. A constant growth rate in EPS B. A variable growth rate in EPS C. No growth in EPS Answer: A

  7. The EPS used in the common stock - rate of return and EPS pricing model should be: A. The expected EPS for the current year B. The average EPS over the last five years C. The projected EPS for the next five years Answer: C

  8. The required rate of return in the common stock - rate of return and EPS pricing model is influenced by: A. Market conditions B. The company's perceived risk C. Both A and B Answer: C

  9. What is the main limitation of the common stock - rate of return and EPS pricing model? A. It assumes a constant growth rate in EPS B. It does not consider the company's debt levels C. It does not account for market fluctuations Answer: A

  10. How can the common stock - rate of return and EPS pricing model be used in conjunction with other valuation methods? A. To compare and verify the results of other valuation methods B. To replace other valuation methods altogether C. To use in isolation as the most reliable valuation method Answer: A



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

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  1. What is the common stock - rate of return and EPS pricing model? Answer: The common stock - rate of return and EPS pricing model is a method used to estimate the fair value of a stock based on its expected earnings per share (EPS) and the investor's required rate of return.

  2. What is EPS in the common stock - rate of return and EPS pricing model? Answer: EPS stands for earnings per share, which is the company's net income divided by the number of outstanding shares of stock.

  3. What is the required rate of return in the common stock - rate of return and EPS pricing model? Answer: The required rate of return represents the investor's expected rate of return on the stock, which takes into account the risk associated with the investment.

  4. How is the fair value of a stock calculated using the common stock - rate of return and EPS pricing model? Answer: The fair value of a stock is calculated by dividing the expected EPS by the investor's required rate of return, adjusted for expected growth in EPS.

  5. What does the expected growth rate represent in the common stock - rate of return and EPS pricing model? Answer: The expected growth rate represents the expected rate of increase in the company's earnings per share over time.

  6. Does the common stock - rate of return and EPS pricing model assume a constant or variable growth rate in EPS? Answer: The model assumes a constant growth rate in EPS.

  7. How is the EPS used in the common stock - rate of return and EPS pricing model determined? Answer: The EPS used in the model is the projected EPS for the next five years.

  8. What factors influence the required rate of return in the common stock - rate of return and EPS pricing model? Answer: The required rate of return is influenced by market conditions and the perceived risk associated with the investment.

  9. What is the main limitation of the common stock - rate of return and EPS pricing model? Answer: The main limitation is that it assumes a constant growth rate in EPS, which may not reflect the actual growth rate of the company.

  10. Can the common stock - rate of return and EPS pricing model be used in conjunction with other valuation methods? Answer: Yes, the model can be used in conjunction with other valuation methods to compare and verify the results.

The common stock - rate of return and EPS pricing model is a commonly used method for estimating the fair value of a stock. This model relies on two key inputs: the expected earnings per share (EPS) and the investor's required rate of return. The EPS is typically based on projections of the company's future earnings, while the required rate of return reflects the investor's expected return on investment, taking into account the perceived risk associated with the investment. To calculate the fair value of a stock using this model, one would first estimate the expected EPS for the next five years, and then project a constant growth rate for EPS beyond that time period. This growth rate is often based on historical trends and market conditions. Once the EPS and growth rate have been estimated, the fair value of the stock can be calculated as the expected EPS divided by the investor's required rate of return, adjusted for expected growth in EPS. One of the main advantages of this model is that it is relatively simple to use and understand. However, it is important to note that it relies heavily on accurate projections of future earnings and growth rates. Additionally, it assumes that the growth rate of EPS will remain constant over time, which may not be a realistic assumption for all companies. Overall, the common stock - rate of return and EPS pricing model is a useful tool for estimating the fair value of a stock. However, it should be used in conjunction with other valuation methods and should be based on careful analysis and research to ensure accurate results. Investors should also be aware of the limitations of the model and the potential risks associated with investing in any particular stock.

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