Question 1

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

Accepted Answer

D5 = 1.57(1.05)^4 = 1.91
P5 = 1.91(1.05)/(.14-.05)= 22.28

Question 2

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

Accepted Answer

1.57(1.05)/(.14-.05)= 18.32

Question 3

Which of the following stock exchanges has the most strict listing requirements?

Accepted Answer

The New York Stock Exchange (NYSE) has the most strict listing requirements among the given options. The NYSE requires companies to have a minimum of 1.1 million publicly traded shares, a market value of at least $100 million, and a minimum price of $4 per share, among other financial and corporate governance criteria. These requirements are higher than the listing requirements of the other exchanges mentioned.

Question 4

The first public sale of company stock to outside investors is called a/an

Accepted Answer

The first public sale of company stock to outside investors is called an initial public offering (IPO). Option A (seasoned equity offering) refers to a subsequent offering of shares by a company that has already gone public. Option B (shareholders' meeting) is a meeting held by a company's shareholders to vote on matters related to the company's operations. Option D (proxy fight) refers to a situation where a group of shareholders try to gain control of a company's board by soliciting proxies from other shareholders.

Question 5

Miller Juice,Inc.is expected to pay a $3.00 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

Accepted Answer

P2 = 4(1.05)/(.12-.05)= 60
P = 3/1.12 + (60+4)/1.12^2 = 53.70

Question 6

Bavarian Sausage,Inc.has preferred stock outstanding.This stock pays a semiannual dividend of $1.25.If the next dividend is paid six months from now and the annual required return is 10%,what should be the value of the preferred stock?

Accepted Answer

1.25/(.10/2)= 25

Question 7

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

Accepted Answer

1.57/(.14-.05)= 17.44

Question 8

What is the market capitalization of a company?

Accepted Answer

The market capitalization of a company is the total market value of all outstanding shares of the company's stock. It is calculated by multiplying the current market price of one share by the total number of outstanding shares.

Question 9

Miller Juice traditionally retains 65% of its earnings for future investments.Last year Miller's return on equity was 15%.What is Miller's growth rate?

Accepted Answer

.15(.65)= .0975

Question 10

Bavarian Sausage free cash flow for the current year is $6,750,000 and investors believe that the company's free cash flow will grow by 5% annually forever.If Bavarian sausage's weighted average cost of capital is 15%,what is their enterprise value?

Accepted Answer

6750000(1.05)/(.15-.05)= 85350000

Question 11

Which statement about common shareholders is incorrect?

Accepted Answer

This statement is incorrect. In the case of bankruptcy, common shareholders have the lowest priority among claimholders, meaning they get paid last after all other creditors and bondholders have been paid off. Therefore, they have no precedence over all other claimholders.

Question 12

Which of the following is not a difficulty associated with valuing common stock?

Accepted Answer

All of the options listed are difficulties associated with valuing common stock.

Question 13

Miller Juice traditionally pays out 35% of its earnings as dividends.Last year Miller's earnings available for common stockholders were $256 million and the book value of its equity was $678 million.What is Miller's growth rate?

Accepted Answer

(256/678)(1-.35)= .2454

Question 14

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the market value of its preferred stock is $5,000,000.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

Accepted Answer

(75000000-23000000-5000000)/3500000 = 13.43

Question 15

Miller Juice,Inc.just paid a $3 dividend.The company is expected to pay a $3.50 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

Accepted Answer

P2 = 4(1.05)/(.12-.05)= 60
P = 3.5/1.12 + (4+60)/1.12^2 = 54.15

Question 16

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the company does not have any preferred stock outstanding.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

Accepted Answer

(75000000-23000000)/3500000 = 14.86

Question 17

Miller Juice,Inc.is not paying a dividend right now,but is expected to pay a $4.56 dividend two years from now.Investors expect that dividend to grow by 4% every year forever.If the required return on the stock investment is 14%,what should be the price of Miller Juice stock today?

Accepted Answer

P2 = 4.56(1.04)/(.14-.04)= 47.42
P = (4.56+47.42)/1.14^2 = 36.49

Question 18

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

Accepted Answer

D5 = 1.57^5 = 2.00
P5 = 2.00(1.05)/(.14-.05)= 23.33

Question 19

Smith Construction,Inc.is expected to pay a $2.78 dividend next year.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

Accepted Answer

D1 = 2.78
D2 = 2.78(1.04)= 2.89
D3 = 2.89(1.04)= 3.01
D4 = 3.01(1.04)= 3.13
P = 2.78/1.1 + 2.89/1.1^2 + 3.01/1.1^3 + 3.13/1.1^4 = 9.31

Question 20

Smith Construction,Inc.just paid a $2.78 dividend.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

Accepted Answer

D1 = 2.78(1.04)= 2.89
D2 = 2.89(1.04)= 3.01
D3 = 3.01(1.04)= 3.13
P = 2.89/1.1 + 3.01/1.1^2 + 3.13^3 = 7.46

Quiz 5: Valuing Stocks