Question 1

Table 7.1 
-The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1)

Accepted Answer

The answer of Table 7.1 
-The required return is assumed...

Question 2

Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of growth changes to 3 percent per year from year five and on. What is the value of the stock if the required rate of return is 8 percent?

Accepted Answer

The answer of Julie's X-Ray Company paid $2.00 per share...

Question 3

Table 7.1 
-Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1. Calculate the growth rate of these dividends.

Accepted Answer

The answer of Table 7.1 
-Xiao Xin owns stock in...

Question 4

In valuation of common stock, the price/earnings multiple approach is considered superior to the use of book or liquidation values since it considers expected earnings.

Accepted Answer

The price/earnings multiple approach takes into account the expected earnings of the company, which is a key factor in determining the value of common stock. Book or liquidation values may not accurately reflect the future earnings potential of the company and therefore may not provide an accurate valuation of common stock. Therefore, the price/earnings multiple approach is generally considered superior to these methods.

Question 5

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Accepted Answer

The answer of Aunt Tilly's Fur Company has been experiencing...

Question 6

Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the value of a share of common stock assuming a zero growth rate of dividends.

Accepted Answer

The answer of Uncle Tim's Inventions has an expected dividend...

Question 7

The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is, the value of a share of stock is the present value of future cash flows.

Accepted Answer

The free cash flow valuation model values a company based on the present value of its future free cash flows, while the P/E (Price-to-Earnings) valuation approach values a company based on its current earnings per share and market perceptions, not directly on future cash flows.

Question 8

China America Manufacturing has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18 percent. The company plans to pay a dividend of $2.45 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2001-2003 period.  Estimate the value of China America Manufacturing's stock.

Accepted Answer

The answer of China America Manufacturing has a beta of...

Question 9

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

Accepted Answer

The answer of Angel recently purchased a block of 100...

Question 10

Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?

Accepted Answer

The answer of Ted has 10 shares of Grand Company....

Question 11

Patrick Company expects to generate free-cash of $120,000 per year forever. If the firm's required return is 12 percent, the market value of debt is $300,000, the market value of preferred stock is $70,000, and the company has 100,000 shares of stock outstanding. What is the value of Patrick's stock?

Accepted Answer

The correct answer is A. The value of Patrick's stock is $6.30. This is calculated by dividing the free cash flow by the required return and then subtracting the value of the debt and preferred stock.

Question 12

The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

Accepted Answer

The answer of The Bradshaw Company's most recent dividend was...

Question 13

Table 7.1 
-Calculate the estimated dividend for 2015. (See Table 7.1)

Accepted Answer

The answer of Table 7.1 
-Calculate the estimated dividend for...

Question 14

The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?

Accepted Answer

The answer of The Oxford Heating Company has been very...

Question 15

The free cash flow valuation model can be used to determine the value of an entire company as the present value of its expected free cash flows discounted at the firm's weighted average cost of capital.

Accepted Answer

The free cash flow valuation model is commonly used to estimate the value of a company based on its expected free cash flows, which are then discounted at the company's weighted average cost of capital (WACC). This approach takes into account both the size and timing of a company's cash flows, as well as the risk associated with those cash flows, and is often used by investors and analysts when evaluating investments in publicly traded companies.

Question 16

Tina's Medical Equipment Company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. What is the value of the stock if the required rate of return is 8 percent?

Accepted Answer

The answer of Tina's Medical Equipment Company paid $2.25 common...

Question 17

In response to the stock market's reaction to its dividend policy, the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year. The firm's most recent dividend is $3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock?

Accepted Answer

The answer of In response to the stock market's reaction...

Question 18

The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the present value of future cash flows.

Accepted Answer

The statement accurately describes the free cash flow valuation model.

Question 19

Compute the value of a share of common stock of Lexi's Cookie Company whose most recent dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10 percent required rate of return.

Accepted Answer

The answer of Compute the value of a share of...

Question 20

Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par). Similar risk preferred stocks are yielding an 11.5 percent annual rate of return.
(a) What is the current value of the outstanding preferred stock?
(b) What will happen to price as the risk-free rate increases? Explain.

Accepted Answer

The answer of Ria's Doll Company has an outstanding preferred...

Quiz 7: Stock Valuation

Table 7.1 -The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1)

Table 7.1 -Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1. Calculate the growth rate of these dividends.