Question 1

Which of the following formulas is INCORRECT?

Accepted Answer

B) PN = 11eaabab_c0a6_427a_b90e_893bb599a27c_TB5536_11

Question 2

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 3

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, 11eaabab_c0a5_cd45_b90e_0b664ddff57a_TB5536_11 11eaabab_c0a5_cd46_b90e_653071b12f91_TB5536_11 11eaabab_c0a5_cd47_b90e_8bae04720eb0_TB5536_11 11eaabab_c0a5_cd48_b90e_8ff862c7f869_TB5536_11 Calculate 11eaabab_c0a5_f459_b90e_53cad7785cbf_TB5536_11

Question 4

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 5

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) 11eaabab_c0a6_427b_b90e_9fa97d99cf3e_TB5536_11

Question 6

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

Accepted Answer

D) During periods of high growth, it is not unusual for these firms to retain 100% of their earnings to exploit profitable investment opportunities.

Question 7

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

Accepted Answer

A) A multistage dividend-discount model can be used to value the stock of a firm with rapid or changing growth.

Question 8

Which of the following statements is FALSE?

Accepted Answer

Total return does not equal earnings multiplied by the dividend payout rate. Total return is the sum of capital gains and dividends.

Question 9

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

B) g = Retention rate × Return on new investment
= ($5 - $1.25) / $5 × 0.13 = 0.0975 or 9.8%

Question 10

Which of the following formulas is INCORRECT?

Accepted Answer

D) rE = (Div1 / P0) + g

Question 11

Which of the following statements is FALSE?

Accepted Answer

D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital adjusted by the growth rate.

Question 12

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 VBC stock is closest to ________.

Accepted Answer

A) 11eaabab_c0a6_698c_b90e_8983b3f765da_TB5536_11

Question 13

You expect KT industries (KTI) will have earnings per share of $4 this year and expect that they will pay out $1.75 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 10%. The value of a share of KTI's stock today is closest to ________.

Accepted Answer

C) g = Retention rate × Return on new investment 11eaabab_c0a6_b7af_b90e_1be37d09ec21_TB5536_11 11eaabab_c0a6_b7b0_b90e_1f3ca63f4ec8_TB5536_11

Question 14

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) 11eaabab_c0a6_909d_b90e_3f666d50e543_TB5536_11 11eaabab_c0a6_909e_b90e_19e61dbb0031_TB5536_11

Question 15

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

Accepted Answer

While diversification can sometimes lead to increased share price, it is not always necessary or guaranteed to do so. Firms can also increase share price through organic growth, cost-cutting measures, or other strategic initiatives. The other statements are true regarding the relationship between retained earnings, dividends, and growth.

Question 16

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 17

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

Question 18

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 may choose to pay dividends to its shareholders or retain earnings to reinvest in the company's growth and development.

Question 19

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 20

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

C) Using a financial calculator, 11eaabab_c0a5_7f21_b90e_45f72a60c8c5_TB5536_11 11eaabab_c0a5_a632_b90e_7b2ef44a6640_TB5536_11 11eaabab_c0a5_a633_b90e_c5273f87798b_TB5536_11 calculate NPV at 11eaabab_c0a5_a634_b90e_cbdcd83e7d94_TB5536_11 equals $38.09.

Quiz 7: Stock Valuation

Which of the following formulas is INCORRECT?

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

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?

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?

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 statements is FALSE about dividend payout and growth?

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

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE?

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 VBC stock is closest to ________.

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

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?

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.

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?