Question 1

Sure Tool Company 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-If Sure's intrinsic value is $21.00 today,what must be its growth rate?

Accepted Answer

k = .04 + 1.25 (.14 - .04); k = .165; .165 = 2/21 + g; g = .07.

Question 2

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

Accepted Answer

The answer of Suppose that the average P/E multiple in...

Question 3

Midwest Airline 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 Midwest Airline has a beta of 3.00.The return you should require on the stock is ________.

Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the required rate of return on Midwest Airline's stock can be calculated as follows:

Required rate of return = risk-free rate + beta*(expected market return - risk-free rate)
 
Required rate of return = 6% + 3.00*(14% - 6%)

Required rate of return = 30%

Therefore, the best choice is C.

Question 4

High Tech Chip 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

Accepted Answer

12.5% × 0.7 = 8.75%.

Question 5

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

Accepted Answer

The answer of A company paid a dividend last year...

Question 6

Torque Corporation 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 Torque Corporation has a beta of 1.2.
-What is the intrinsic value of Torque's stock?

Accepted Answer

The answer of Torque Corporation is expected to pay a...

Question 7

Sure Tool Company 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-The market's required rate of return on Sure's stock is _____.

Accepted Answer

The market's required rate of return on Sure's stock can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 4% + 1.25 * (14% - 4%) = 16.5%.

Question 8

High Tech Chip 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

Accepted Answer

The dividend growth model is used here. The growth rate (g) is ROE * plowback ratio = 12.5% * 60% = 7.5%. The dividend in the coming year is last year's dividend * (1 + g) = $2.50 * 1.075 = $2.6875, approximately $2.69.

Question 9

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 _____.

Accepted Answer

The intrinsic value of KMP stock is calculated by multiplying the expected EPS by the average P/E multiple: 17 * $5.50 = $93.50.

Question 10

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 _____.

Accepted Answer

The intrinsic value of Exxon stock is $33.00. This is calculated by multiplying the expected EPS of $1.50 by the average P/E multiple of 22.

Question 11

An analyst has determined that the intrinsic value of IBM 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 IBM in the coming year is ______.

Accepted Answer

The intrinsic value of a stock using the capitalized earnings model is calculated as the expected EPS divided by the capitalization rate. The capitalization rate is typically the P/E ratio. Therefore, the expected EPS can be calculated as the intrinsic value multiplied by the capitalization rate. In this case, the intrinsic value is $80 and the P/E ratio is 22, so the expected EPS is $80 * 22 = $1760.

Question 12

Fools Gold Mining Company 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 Fools Gold Mining Company has a beta of -0.25.The return you should require on the stock is ________.

Accepted Answer

The required return can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * (Market return - Risk-free rate). Substituting the given values: Required return = 6% + (-0.25) * (14% - 6%) = 6% - 2% = 4%.

Question 13

An analyst has determined that the intrinsic value of HPQ 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 HPQ in the coming year is ______.

Accepted Answer

The intrinsic value of a stock using the capitalized earnings model is calculated as EPS multiplied by the P/E ratio. Given the intrinsic value is $20 and the P/E ratio is 25, the expected EPS is $20 / 25 = $0.80.

Question 14

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

Accepted Answer

The intrinsic value of Dominion Oil stock can be calculated as follows:
Intrinsic Value = EPS x P/E multiple
Intrinsic Value = $3.00 x 20
Intrinsic Value = $60.00
Therefore, the intrinsic value of Dominion Oil stock is $60.00.

Question 15

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 is ______.

Accepted Answer

The intrinsic value is calculated as P/E ratio multiplied by EPS. Given the intrinsic value is $34 and P/E is 27, the expected EPS is $34 / 27 = $1.26.

Question 16

Old Quartz Gold Mining 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 Old Quartz Gold Mining Company has a beta of -0.25.The intrinsic value of the stock is ______.

Accepted Answer

The answer of Old Quartz Gold Mining Company is expected...

Question 17

Torque Corporation 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 Torque Corporation has a beta of 1.2.
-What is the return you should require on Torque's stock?

Accepted Answer

To calculate the required return on Torque's stock, we need to use the Capital Asset Pricing Model (CAPM):

Required return = risk-free rate + beta*(market return - risk-free rate)

Required return = 5% + 1.2*(13% - 5%)

Required return = 5% + 1.2*8%

Required return = 5% + 9.6%

Required return = 14.6%

Therefore, the required return on Torque's stock is 14.6%, which is closest to choice B (14.6%).

Question 18

Sure Tool Company 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-What is the intrinsic value of Sure's stock today?

Accepted Answer

Using the dividend discount model, we can calculate the intrinsic value of Sure Tool Company's stock today:

Expected dividend = $2
Discount rate (required rate of return) = risk-free rate + beta x (expected market return - risk-free rate) = 4% + 1.25 x (14% - 4%) = 4% + 12.5% = 16.5%
Expected stock price in one year = $22

Intrinsic value = (Expected dividend + Expected stock price in one year) / (1 + Discount rate) = ($2 + $22) / (1 + 16.5%) = $20.60. Therefore, the intrinsic value of Sure Tool Company's stock today is $20.60.

The best choice is A.

Question 19

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 _______.

Accepted Answer

The answer of Sunshine Corporation is expected to pay a...

Question 20

Low Fly Airline 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 Low Fly Airline has a beta of 3.00.The intrinsic value of the stock is ______.

Accepted Answer

The intrinsic value of the stock is $46.67. This is calculated using the Gordon Growth Model, which is:Intrinsic Value = Dividend / (Required Rate of Return - Growth Rate)In this case, the dividend is $7, the required rate of return is 14% (the expected return on the market portfolio), and the growth rate is 15%. Plugging these values into the formula, we get:Intrinsic Value = $7 / (0.14 - 0.15) = $46.67

Quiz 18: Option Valuation