Question 1

Valorous Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Accepted Answer

Using the dividend discount model, we can calculate the maximum price a prudent investor would be willing to pay for a share of Valorous stock today:

PV = (D1/(1+r) + D2/(1+r)^2 + P0/(1+r)^2)

PV = (2.35/(1+0.09) + 41/(1+0.09)^2) + (1.75/(1+0.09)) = $38.09

Therefore, the maximum price a prudent investor would be willing to pay for a share of Valorous stock today is $38.09. The closest option is C) $38.09.

Question 2

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________.

Accepted Answer

D) 11ea84dc_f562_dd8e_9a63_17f19707263f_TB1316_11_TB1316_11

Question 3

Which of the following formulas is INCORRECT?

Accepted Answer

The formula for PS1U1B1NS1U1B0 is incorrect as it is missing the factor of (1+r)^n, which represents the time value of money. The correct formula should be PS1U1B1NS1U1B0 = (rS1U1B1ES1U1B0 - g)× DivS1U1B1N/ (rS1U1B1ES1U1B0 - g)^(N+1).

Question 4

The Sisyphean Company's common stock is currently trading for $25.50 per share. The stock is expected to pay a $2.80 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 10%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to ________.

Accepted Answer

C) 11ea84dc_f563_2bb0_9a63_a3348fffc40b_TB1316_11_TB1316_11 11ea84dc_f563_2bb1_9a63_e9f5704751c0_TB1316_11_TB1316_11

Question 5

Which of the following statements is FALSE about dividend payout and growth?

Accepted Answer

During periods of high growth, firms typically retain earnings to fund future growth opportunities rather than paying out 100% of their earnings as dividends. Therefore, statement D is false.

Question 6

Von Bora Corporation (VBC)is expected to pay a $3.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 13%, then the value of a share of VBS stock is closest to ________.

Accepted Answer

The value of a stock with constant growth can be calculated using the Gordon Growth Model: P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Here, P = $3 / (0.13 - 0.06) = $42.86.

Question 7

You expect KT industries (KTI)will have earnings per share of $5 this year and expect that they will pay out $2.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 14% and their equity cost of capital is 11%. The value of a share of KTI's stock today is closest to ________.

Accepted Answer

We can use the Dividend Discount Model to find the value of KTI's stock:

V = D / (r - g)

Where:
- V is the value of the stock
- D is the dividend payout per share
- r is the cost of equity (in this case, the equity cost of capital)
- g is the growth rate of dividends (which we can calculate as the payout ratio times the return on new investments)

Plugging in the given values, we get:

V = 2.5 / (0.11 - 0.14*0.5)
V = 2.5 / 0.04
V = 62.50

Therefore, the value of a share of KTI's stock today is closest to $62.50, which is answer choice C.

Question 8

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future?

Accepted Answer

A) P₀ = $0.70 / 0.079 = $8.86

Question 9

Which of the following statements is FALSE?

Accepted Answer

According to the constant dividend growth model, the value of the firm depends on the future expected dividends, not just the current dividend level. The formula is V0 = D1 / (r - g), where V0 is the current value of the stock, D1 is the expected dividend in the next period, r is the required rate of return on the stock, and g is the expected dividend growth rate.

Question 10

Which of the following statements is FALSE?

Accepted Answer

Total return equals earnings multiplied by the dividend payout rate is false. Total return equals dividend yield plus capital appreciation.

Question 11

You expect KT industries (KTI)will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTI's dividends is closest to ________.

Accepted Answer

Using the dividend growth model:

Expected dividend payout = EPS x payout ratio = $5 x 0.25 = $1.25

Expected growth rate = Retention rate x return on new investments = (1 - payout ratio) x return on new investments = 0.75 x 13% = 9.75%

Using the Gordon growth model:

Expected dividend payout = EPS x payout ratio = $5 x 0.25 = $1.25

Expected growth rate = (return on equity - dividend yield) x retention rate = (15% - 1.25/5) x 0.75 = 9.375%

The closest answer to this rate is 9.8% (answer choice B).

Question 12

Which of the following statements is FALSE regarding profitable and unprofitable growth?

Accepted Answer

Diversification does not necessarily guarantee an increase in share price. Profitable growth can be achieved through different strategies such as expanding into new markets, developing new products, improving operational efficiency, and acquiring complementary businesses. Diversification may even lead to lower profitability and ultimately decrease the value of the firm.

Question 13

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year?

Accepted Answer

D) P₀ = $2.60 / 0.11 = $23.64

Question 14

Which of the following formulas is INCORRECT?

Accepted Answer

D) r_E = (Div₁ / P₀) + g

Question 15

Which of the following is NOT a way that a firm can increase its dividend?

Accepted Answer

Increasing the retention rate means the firm is retaining more earnings for reinvestment rather than distributing them as dividends, which does not increase the dividend.

Question 16

Which of the following statements is FALSE of the dividend-discount model?

Accepted Answer

The dividend-discount model assumes a constant growth rate in perpetuity, which is not realistic for firms with rapid or changing growth. This can lead to an inaccurate valuation when using this model for such firms. The other statements are true.

Question 17

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future?

Accepted Answer

A) P₀ = $1.25 / 0.084 = $14.88

Question 18

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?

Accepted Answer

A) Using a financial calculator, 11ea84dc_f561_f328_9a63_bfd8362ed970_TB1316_11_TB1316_11 11ea84dc_f561_f329_9a63_4bb7352a1e08_TB1316_11_TB1316_11 11ea84dc_f561_f32a_9a63_13bcec5a340e_TB1316_11_TB1316_11 11ea84dc_f562_1a3b_9a63_5d3268c044eb_TB1316_11_TB1316_11 Calculate 11ea84dc_f562_1a3c_9a63_1f0262b9a411_TB1316_11_TB1316_11

Question 19

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

Accepted Answer

A) r_E = Div₁/ P₀ + g 0.1 = 0.045 + g, so g = 5.5%

Question 20

A firm can either pay its earnings to its investors, or it can keep them and reinvest them.

Accepted Answer

This statement is true. A firm has the option to pay out its earnings to investors in the form of dividends or retain the earnings and reinvest them in the company for future growth.

Quiz 7: Stock Valuation

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________.

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE about dividend payout and growth?

Von Bora Corporation (VBC) is expected to pay a $3.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 13%, then the value of a share of VBS stock is closest to ________.

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE regarding profitable and unprofitable growth?

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year?

Which of the following formulas is INCORRECT?

Which of the following is NOT a way that a firm can increase its dividend?

Which of the following statements is FALSE of the dividend-discount model?

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future?

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

A firm can either pay its earnings to its investors, or it can keep them and reinvest them.