Question 1

Gadgets Inc.just paid a dividend of $1.55.It expects its earnings and dividends to decline at a rate of 3 percent per year indefinitely.What is the value of the stock today if the required return is 12.5 percent?

Accepted Answer

P₀ = [$1.55*(1-3%)]/(12.5%+3%)= $9.70

Question 2

The common stock of Atlantic Fishing Ltd.currently sells for $48 per share.The firm has a constant dividend growth rate of 6 percent.If the required rate of return is 15 percent,what is the expected dividend yield on the stock?

Accepted Answer

Dividend yield = k_c−g = 15%-6% = 9%

Question 3

BC Corporation common stock has just paid a dividend of $2.20 per share.Its dividend is expected to grow at a rate of 5 percent per year indefinitely.The current stock price is $30 and the risk premium associated with this stock is 8.7 percent.What is the implied risk-free rate?

Accepted Answer

RF = [$2.20*(1 + 5%)/$30+5%]-8.7%

Question 4

Jack had an investment return of -24 percent on a stock that he bought for $100 a year ago.What is the sale price of the stock if he received a dividend of $1.75 during the year?

Accepted Answer

P₁ = $100+$100*(-24%)−$1.75 = $74.25

Question 5

The market value of Monteregie Corporation's 1 million outstanding common shares is $22.5 million.The firm is expected to have earnings of $1,750,000 next year.The 90-day government T-bill yields 3.75 percent.What is the present value of growth opportunities if the risk premium is 8.4 percent?

Accepted Answer

PVGO = $22,500,000/1,000,000−($1,750,000/1,000,000)/12.15% = $8.10

Question 6

Toronto Skates Inc.'s common stock is selling at $22.22 per share.Investors expect to receive a dividend of $1.80.The 90-day government T-bill yield is 4.3 percent.What is the dividend growth rate if the risk premium on comparable companies is 6.2 percent?

Accepted Answer

Dividend growth rate,G = (4.3%+6.2%)- ($1.80/$22.22)=2.40%

Question 7

Charlotte purchased a share for $50 a year ago.She received $2.40 in dividends and sold the stock for $52.If the inflation rate over the year was 2.6 percent,her exact real rate of return is

Accepted Answer

Compute the nominal return,K = (2.4+52)/50 = 8.8%
then the real return,1.088/1.026-1 = 6.04%

Question 8

Zigzag Corporation's common stock is selling for $22 per share in the market.Zigzag's EPS is expected to be $2 next year,and the required rate of return is 12 percent.What is the present value of growth opportunities per share?

Accepted Answer

PVGO = $22-$2/12% = $5.33

Question 9

According to the DDM,if a firm increases its retention rate what happens to the firm's share price assuming no dividend growth and no earnings growth?

Accepted Answer

If a firm increases its retention rate, it pays out less in dividends. According to the Dividend Discount Model (DDM), if dividends decrease and there is no growth in dividends or earnings, the share price will decrease.

Question 10

The stock of Townships Ski Resorts Inc.just paid a dividend of $0.78.What is the expected capital gains yield if the stock is selling for $28.25 today and the required rate of return is 15 percent?

Accepted Answer

Capital gains yield,G = (kc*P₀-D₀₎/(P₀+D₀₎ = (15%*$28.25-$0.78)/($28.25+$0.78)= 11.91%

Question 11

Maple Drinks Corp.has just announced a dividend of $0.80 for this year and $0.835 for the next year.Dividends are expected to grow at a constant rate indefinitely.What is the current stock price if the required return is 13.1 percent?

Accepted Answer

Compute g = $0.835/$0.80-1 = 4.375%,Then P₀ = D₁/k_c-g = $0.835/13.10%-−4.375% = $9.57

Question 12

Toronto Skates Inc.is paying dividends on a regular basis with a constant growth rate.The dividend last year was $ 1.00 and this year is $1.25.If the required rate of return is 12%,what is the price of the stock?

Accepted Answer

G = (D₁ - D₀)/D₀ = 25% which is higher than 12%

Question 13

BC Electrics Inc.pays a constant dividend of $2 every year.What will the stock sell for three years from now if the required rate of return is 9 percent?

Accepted Answer

P₃ = 2/9%

Question 14

Poutine Professionals Inc.has just paid a dividend of $0.55 per share.The dividends are expected to grow at an annual rate of 5 percent indefinitely.What is today's stock price if the required return is 12.5 percent?

Accepted Answer

K_c = [$0.55(1+5%)]/(12.5%−5%)= $7.70

Question 15

Toronto Skates Inc.is offering a dividend of $1 next year and the stock sells for $20.If the required rate of return is 8 percent,what is the capital growth rate?

Accepted Answer

8%-1/20=3%

Question 16

Suppose Delightful Inc.'s present value of growth opportunities per share is $6 and its current share price is $18.What is the firm's required rate of return if its expected EPS is $2.25?

Accepted Answer

K_c = $2.25/($18-$6)= 18.75%

Question 17

Prairies Oil Sands Inc.is expected to pay a dividend of $1 in one year.If the dividend growth rate is 2 percent forever and the required return is 10 percent,what should the stock be sold for five years from now?

Accepted Answer

Compute D₆ = $1*(1+2%)⁵ = $1.1041,Then P₅ = $1.1041/(10%-2%)= $13.80

Question 18

Analysts announced estimated earnings per share of $4 for the coming year for Toronto Skates Inc.The company plans not to pay any dividends for the next three years.For the subsequent two years,the company plans on retaining 50 percent of its earnings,and then 25 percent of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20 percent per year.If the required rate of return is 12 percent,then the price is:

Accepted Answer

11ea8229_3494_d3da_bbd8_4b20e05cebbb_TB1726_00 P = 3.17/(1+12%)⁴+3.48/(1+12%)⁵+{5.49+[5.49*{(1+5%)/(12%-5%)}]/(1+12%)⁶ = 48.48

Question 19

Atlantic Fishing Ltd.common stock has just paid a dividend of $1.80 per share and is selling for $34.48 each.The firm expects its dividend to grow at a constant rate of 6.3 percent a year.What is the risk premium associated with the stock if the risk-free rate is 4.25 percent?

Accepted Answer

RP = [$1.80*(1.063)/$34.48+0.063] -0.0425 = 0.076

Question 20

Lac Superior Enterprises has just paid a dividend of $1.05 and will pay $1.10 next year.Dividends are expected to grow at a constant rate indefinitely.What is the required rate of return if the stock is selling for $30 today?

Accepted Answer

Compute g = $1.10/$1.05-1 = 4.762%,Then k_c = $1.10/$30+4.762% = 8.43%

Quiz 7: Equity Valuation