Deck 18: Equity Valuation Models

Question 1

Historically, P/E ratios have tended to be

A) higher when inflation has been high.
B) lower when inflation has been high.
C) uncorrelated with inflation rates but correlated with other macroeconomic variables.
D) uncorrelated with any macroeconomic variables, including inflation rates.

Answer 1

B

Question 2

_________ is equal to common shareholders' equity divided by common shares outstanding.

A) Book value per share
B) Liquidation value per share
C) Market value per share
D) Tobin's Q

Answer 2

A

Question 3

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) Specialists

Answer 3

B

Question 4

The ______ is a common term for the market consensus value of the required return on a stock.

A) dividend payout ratio
B) intrinsic value
C) market capitalization rate
D) plowback rate
E) None of the options are correct.

Question 5

Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming year. The expected growth rate of dividends is 9% for both stocks. You require a rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C

A) will be greater than the intrinsic value of stock D.
B) will be the same as the intrinsic value of stock D.
C) will be less than the intrinsic value of stock D.
D) cannot be calculated without knowing the market rate of return.

Question 6

Turtle Corp has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

A) 6.0%
B) 4.8%
C) 7.2%
D) 3.0%

Question 7

The Gordon model

A) is a generalization of the perpetuity formula to cover the case of a growing perpetuity.
B) is valid only when g is less than k.
C) is valid only when k is less than g.
D) is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.
E) is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

Question 8

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X

A) will be greater than the intrinsic value of stock Y.
B) will be the same as the intrinsic value of stock Y.
C) will be less than the intrinsic value of stock Y.
D) will be the same or greater than the intrinsic value of stock Y.
E) None of the options are correct.

Question 9

Melody Corp has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

A) 4.8%
B) 5.6%
C) 7.2%
D) 6.0%

Question 10

The _________ is the fraction of earnings reinvested in the firm.

A) dividend payout ratio
B) retention rate
C) plowback ratio
D) dividend payout ratio and plowback ratio
E) retention rate or plowback ratio

Question 11

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A

A) will be greater than the intrinsic value of stock B.
B) will be the same as the intrinsic value of stock B.
C) will be less than the intrinsic value of stock B.
D) cannot be calculated without knowing the market rate of return.

Question 12

Riga Corp has an expected ROE of 16%. The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

A) 3.0%
B) 6.0%
C) 7.2%
D) 4.8%

Question 13

You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock C

A) will be greater than the intrinsic value of stock D.
B) will be the same as the intrinsic value of stock D.
C) will be less than the intrinsic value of stock D.
D) will be the same or greater than the intrinsic value of stock D.
E) None of the options.

Question 14

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

A) dividend-payout ratio
B) intrinsic value
C) market-capitalization rate
D) plowback ratio

Question 15

You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C

A) will be greater than the intrinsic value of stock D.
B) will be the same as the intrinsic value of stock D.
C) will be less than the intrinsic value of stock D.
D) will be the same or greater than the intrinsic value of stock D.
E) None of the options are correct.

Question 16

You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A

A) will be greater than the intrinsic value of stock B.
B) will be the same as the intrinsic value of stock B.
C) will be less than the intrinsic value of stock B.
D) will be the same or greater than the intrinsic value of stock B.
E) None of the options are correct.

Question 17

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

A) Book value per share
B) Liquidation value per share
C) Market value per share
D) Tobin's Q

Question 18

High P/E ratios tend to indicate that a company will _______, ceteris paribus.

A) grow quickly
B) grow at the same speed as the average company
C) grow slowly
D) not grow
E) None of the options are correct.

Question 19

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to

A) V₀ = (Expected dividend yield in year 1)/k.
B) V₀ = (Expected EPS in year 1)/k.
C) V₀ = (Treasury bond yield in year 1)/k..
D) V₀ = (Market return in year 1)/k.

Question 20

Since 1955, Treasury bond yields and earnings yields on stocks have been

A) identical.
B) negatively correlated.
C) positively correlated.
D) uncorrelated.

Question 21

The most popular approach to forecasting the overall stock market is to use

A) the dividend multiplier.
B) the aggregate return on assets.
C) the historical ratio of book value to market value.
D) the aggregate earnings multiplier.
E) Tobin's Q.

Question 22

A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $0.275
B) $27.50
C) $31.82
D) $56.25

Question 23

One of the problems with attempting to forecast stock market values is that

A) there are no variables that seem to predict market return.
B) the earnings multiplier approach can only be used at the firm level.
C) the level of uncertainty surrounding the forecast will always be quite high.
D) dividend-payout ratios are highly variable.
E) None of the options are correct.

Question 24

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $33.33
B) $0.27
C) $31.82
D) $56.25

Question 25

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

A) $23.91
B) $24.11
C) $26.52
D) $27.50
E) None of the options are correct.

Question 26

Zoom Corp has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.

A) 3.0%
B) 4.8%
C) 7.5%
D) 6.0%

Question 27

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

A) $30.23
B) $24.11
C) $26.52
D) $27.50
E) None of the options are correct.

Question 28

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.

A) $23.91
B) $24.11
C) $26.52
D) $27.50
E) None of the options are correct.

Question 29

A preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $0.75
B) $7.50
C) $64.12
D) $56.25
E) None of the options are correct.

Question 30

Shark Tank Corp has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

A) 2.6%
B) 10%
C) 23.4%
D) 90%

Question 31

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $11.56
B) $9.65
C) $11.82
D) $10.42

Question 32

Red Stapler Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Red Stapler's book value per share?

A) $1.68
B) $2.60
C) $32.14
D) $60.71
E) None of the options are correct.

Question 33

Mednas Corp has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

A) 3.0%
B) 4.8%
C) 8.25%
D) 9.0%

Question 34

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

A) $23.91
B) $14.96
C) $26.52
D) $27.50
E) None of the options are correct.

Question 35

Juice & Fruit Corp has an expected ROE of 9%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

A) 90%
B) 10%
C) 9%
D) 0.9%

Question 36

A preferred stock will pay a dividend of $6.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $0.60
B) $6.00
C) $600
D) $60.00
E) None of the options are correct.

Question 37

Red Stapler Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. Shares currently sell for $90. What is Red Stapler's market value per share?

A) $1.68
B) $2.60
C) $32.14
D) $60.71
E) None of the options are correct.

Question 38

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25. The market's required rate of return on Confusion's stock is

A) 14.0%.
B) 17.5%.
C) 16.5%.
D) 15.25%.
E) None of the options are correct.

Question 39

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $0.39
B) $0.56
C) $31.82
D) $56.25

Question 40

Toria Corp has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings.

A) 3.75%
B) 11.25%
C) 8.25%
D) 15.0%

Question 41

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. The beta of Confusion Corp's stock is 1.25. If Confusion's intrinsic value is $21.00 today, what must be its growth rate?

A) 0.0%
B) 10%
C) 4%
D) 6%
E) 7%

Question 42

Northern Train Corp is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Northern Train Corp has a beta of 3.00. The return you should require on the stock is

A) 10%.
B) 18%.
C) 30%.
D) 42%.

Question 43

Thrones Dragon Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Thrones Dragon Company has a beta of −0.25. The intrinsic value of the stock is

A) $80.00.
B) $133.33.
C) $200.00.
D) $400.00.

Question 44

An analyst has determined that the intrinsic value of Coca Cola stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of Coca Cola in the coming year is

A) $3.64.
B) $4.44.
C) $14.40.
D) $22.50.

Question 45

Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25. What is the intrinsic value of Confusion's stock today?

A) $20.60
B) $20.00
C) $12.12
D) $22.00

Question 46

Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be

A) $33.00.
B) $35.55.
C) $63.00.
D) $72.00.
E) None of the options are correct.

Question 47

Suppose that the average P/E multiple in the oil industry is 16. Graphite Corp is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Graphite Corp stock should be

A) $28.12.
B) $35.55.
C) $63.00.
D) $72.00.
E) None of the options are correct.

Question 48

Salted Chips Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be

A) $1.00.
B) $2.50.
C) $2.69.
D) $2.81.
E) None of the options are correct.

Question 49

The Wrench Company is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of the Wrench Company has a beta of 1.2. What is the intrinsic value of The Wrench's stock?

A) $14.29
B) $14.60
C) $12.33
D) $11.63

Question 50

Salted Chips Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be

A) 5.00%.
B) 6.25%.
C) 6.60%.
D) 7.50%.
E) 8.75%.

Question 51

Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be

A) $28.12.
B) $93.50.
C) $63.00.
D) $72.00.
E) None of the options are correct.

Question 52

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

A) $22.73.
B) $27.50.
C) $28.57.
D) $38.46.

Question 53

An analyst has determined that the intrinsic value of VM CORP stock is $20 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of VM CORP in the coming year is

A) $3.63.
B) $4.44.
C) $0.80.
D) $22.50.

Question 54

Suppose that the average P/E multiple in the oil industry is 20. Non-Standard Oil Corp is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Non-Standard Oil Corp stock should be

A) $28.12.
B) $35.55.
C) $60.00.
D) $72.00.
E) None of the options are correct.

Question 55

A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be

A) $1.80.
B) $2.12.
C) $1.77.
D) $1.94.

Question 56

No Fly Airlines is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of No Fly Airlines has a beta of 3.00. The intrinsic value of the stock is

A) $46.67.
B) $50.00.
C) $56.00.
D) $62.50.

Question 57

The Wrench Company is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of the Wrench Company has a beta of 1.2. What is the return you should require on The Wrench's stock?

A) 12.0%
B) 14.6%
C) 15.6%
D) 20%
E) None of the options are correct.

Question 58

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is

A) $10.71.
B) $15.00.
C) $17.75.
D) $25.00.

Question 59

An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year will be

A) $3.63.
B) $4.44.
C) $14.40.
D) $1.26.

Question 60

Slow Silver Scuba Corp is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Slow Silver Scuba Corp has a beta of −0.25. The return you should require on the stock is

A) 2%.
B) 4%.
C) 6%.
D) 8%.

Question 61

In the dividend discount model, which of the following are not incorporated into the discount rate?

A) Real risk-free rate
B) Risk premium for stocks
C) Return on assets
D) Expected inflation rate

Question 62

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is

A) 6%.
B) 10%.
C) 14%.
D) 20%.

Question 63

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

A) $1,000,000.
B) $2,000,000.
C) $3,000,000.
D) $4,000,000.

Question 64

A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's anticipated growth rate is

A) 5.6%.
B) 10%.
C) 14%.
D) 20%.

Question 65

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

A) $17.67.
B) $13.00.
C) $16.67.
D) $18.67.

Question 66

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be

A) 7.69.
B) 8.33.
C) 9.09.
D) 11.11.
E) None of the options are correct.

Question 67

The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today?

A) $8.99
B) $25.21
C) $39.71
D) $110.00
E) None of the options are correct.

Question 68

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has

A) an anticipated earnings growth rate which is less than that of the average firm.
B) a dividend yield which is less than that of the average firm.
C) less predictable earnings growth than that of the average firm.
D) greater cyclicality of earnings growth than that of the average firm.

Question 69

JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

A) $33.00
B) $40.67
C) $71.80
D) $66.00
E) None of the options are correct.

Question 70

The market-capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is 90%, the P/E ratio will be

A) 7.69.
B) 8.33.
C) 9.09.
D) 11.11.
E) 50.

Question 71

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the market-capitalization rate for Risk Metrics?

A) 13.6%
B) 13.9%
C) 15.6%
D) 16.9%
E) None of the options are correct.

Question 72

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market-capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is

A) $150,000.
B) $180,000.
C) $300,000.
D) $380,000.

Question 73

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock?

A) 0.8
B) 1.0
C) 1.1
D) 1.4
E) None of the options are correct.

Question 74

Assume that Malnava Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

A) $28.57.
B) $28.79.
C) $30.00.
D) $31.78.
E) None of the options are correct.

Question 75

Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth

A) $9.00.
B) $10.57.
C) $20.00.
D) $22.22.

Question 76

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that

A) the stock experienced a drop in the P/E ratio.
B) the firm had a decrease in dividend-payout ratio.
C) the firm increased the number of shares outstanding.
D) the required rate of return decreased.

Question 77

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 75%, the P/E ratio will be

A) 7.69.
B) 8.33.
C) 9.09.
D) 11.11.
E) None of the options are correct.

Question 78

Antiquated Products Corporation produces goods that are very mature in their product life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3. After year 3, dividends are expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth

A) $8.98.
B) $10.57.
C) $20.00.
D) $22.22.

Question 79

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.

A) $33.00
B) $39.86
C) $55.00
D) $66.00
E) $40.68

Question 80

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

A) dividend-payout ratio
B) degree of financial leverage
C) variability of earnings
D) inflation rate