Deck 8: Stock Valuation and Market Efficiency

Question 1

Wernam Hogg Class A preferred shares have a par value of $100 and offer an annual dividend at 0.8% of par value. Wernham Hogg is experiencing cash flow problems due to poor market conditions in the commercial paper business. The company has suspended dividends on the Class A preferred shares. Analysts do not expect the dividends to resume for another 3 years, at which point they are expected to resume in perpetuity. If investors require a return of 2.25%, then what is the fair price for the preferred shares today?

A)$34.01
B)$34.77
C)$35.56
D)$96.65
E)$340.08

Answer 1

$34.01

Question 2

Pan Am Airlines issued emergency preferred shares after its reorganization. The preferred share has a fixed dividend of $1 payable at the end of each of the next three years. At the end of the three years it matures and pays its par value. The par value is equal to the value of the common shares at that time. The common shares are currently trading for $37.08. They pay no dividends currently, but are forecast to begin paying a dividend in four years at $3.55 per share. The dividend is expected to grow at 4% in perpetuity and common shareholders expect a return of 11%. What is the fair market value for the preferred shares today if the preferred shareholders require a 9% rate of return?

A)$37.08
B)$38.46
C)$38.63
D)$39.16
E)$41.69

Answer 2

$41.69

Question 3

The preferred stock of Selena Corp. pays a dividend of $1.50 per share. If Selena preferred stock currently sells for $10 per share, the required rate of return is:

A)15%
B)10%
C)7%
D)12%
E)14%

Answer 3

15%

Question 4

The purchase and sale of securities after the original issuance occurs in the:

A)Dealer Market
B)Secondary Market
C)Auction Market
D)Liquidation Market
E)Primary Market

Question 5

Preferred stock is valued as if it were

A)a fixed-income obligation.
B)a bond.
C)a perpetuity.
D)a common stock.

Question 6

________ have a higher payment priority than do ________.

A)Preferred dividends; bond interest payments
B)Common dividends; bond interest payments
C)Common dividends; preferred dividends
D)Preferred dividends; common dividends
E)Preferred dividends; zero-coupon payments

Question 7

Which of the following is not a characteristic of preferred stock?

A)Common stock dividends must be paid before preferred dividends.
B)Preferred stock dividends may be delayed.
C)Preferred dividends are assumed to be infinite in duration.
D)Preferred dividends are typically given less legal priority than bond interest payments.
E)Preferred stock does not mature like a bond.

Question 8

Universal Export's preferred shares pay a 6.5% annual dividend on a $50-par value. The next dividend is due in one year. The required return of preferred shareholders is 9%. What is the fair price for the preferred shares?

A)$3.25
B)$36.11
C)$50.00
D)$53.25
E)$69.23

Question 9

A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the nominal annual rate of return?

A)12%
B)18%
C)20%
D)23%
E)28%

Question 10

All of the following are characteristics of common stock EXCEPT:

A)Tax-deductible dividends
B)Claims on income and assets which are subordinate to the creditors of the firm
C)Voting rights which permit selection of the firm's directors
D)That there is no fixed payment obligation

Question 11

A share of perpetual preferred stock pays an annual dividend of $6 per share. If investors require a 12% rate of return, what should be the price of this preferred stock?

A)$57.25
B)$50.00
C)$62.38
D)$46.75
E)$41.64

Question 12

Versalife Inc. just paid a dividend of $1.32 on its common stock, and the next dividend will be paid one year from now. You require a return of 6%. What is the market price of this stock if there is no growth in annual dividends?

A)$1.26
B)$12.00
C)$20.68
D)$22.00

Question 13

Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share. However, you have limited resources now, so you cannot afford the purchase price. In fact, the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6%, but where interest is compounded daily (assume 365 days). Because the preferred stock is riskier, it has a required annual rate of return of 12% (assume that this rate will remain constant over the next 5 years). For you to be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t = 0?

A)$2,985.00
B)$4,291.23
C)$3,138.52
D)$3,704.18
E)$4,831.25

Question 14

Universal Export's Preferred shares will pay their first dividend in five years. The dividend will be 6.5% on a $50-par value. Assume that the dividends will continue annually in perpetuity at that level. The required return of preferred shareholders is 9%. What is the fair price for the preferred shares?

A)$23.47
B)$25.58
C)$36.11
D)$49.04
E)$50.00

Question 15

If Genco's preferred stock pays a dividend of $5 per share and its investors require an 8% return, what should its price per share of preferred stock be?

A)$50.00
B)$.40
C)$62.50
D)$6.25
E)$12.75

Question 16

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

A)$4.00
B)$80.00
C)$8.00
D)$8.80
E)$32.00

Question 17

A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.

A)$25
B)$50
C)$64
D)$16

Question 18

You just purchased preferred shares in Initech for $45.71. Initech pays annual dividends of $0.64. What is your required return on this investment?

A)1.40%
B)5.40%
C)8.50%
D)10.00%
E)14.00%

Question 19

Wernam Hogg Class A preferred shares have a par value of $100 and offer an annual dividend at 0.8% of par value. Wernham Hogg Class A Preferred shares paid their annual dividend yesterday and are currently priced at $16 to yield 5%. The central bank is threatening to tighten monetary policy. The chief economist predicts that all interest rates will rise by 2% over the coming year (the yield on the Wernham Hogg Class A Preferred shares will also rise to 7%). If you sell your Wernham Hogg Class A Preferred shares in one year after the interest rate increase (and after the next dividend), then what return will you have earned on the investment assuming that you bought at today's price?

A)-89.7%
B)-28.6%
C)-23.6%
D)5.0%
E)21.3%

Question 20

A share of preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is your nominal (not effective)annual rate of return?

A)10%
B)8%
C)6%
D)12%
E)14%

Question 21

________ stocks are stocks for which the stock price is low compared to earnings or to the accounting value of the firm's assets.

A)Value
B)Growth
C)Technical
D)High dividend yield
E)Fundamental

Question 22

The industry average P/E for the athletics and apparel industry is 18.8. Estimate the fair value of Nike's shares based on the industry average multiple and the data supplied in the table, below. $$\begin{array} { | l | l | } \hline \text { Price } & \$ 65 \\\hline \text { EPS } & \$ 3 \\\hline \text { Debt } & \$ 545 \mathrm { M } \\\hline \text { Equity } & \$ 9,087 \mathrm { M } \\\hline \text { Cash } & \$ 3,630 \mathrm { M } \\\hline \text { EBITDA } & \$ 2,770 \mathrm { M } \\\hline \text { Shares } & 487 \mathrm { M } \\\hline\end{array}$$

A)$11.43
B)$56.40
C)$65.00
D)$68.00
E)$87.50

Question 23

Bubble.com Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying annual dividends in 5 years. The first dividend will be $2 and dividends are expected to grow at 5% in perpetuity thereafter. Given a required return of 11%, what should the price of the stock be today?

A)$19.78
B)$20.77
C)$21.96
D)$24.24
E)$24.37

Question 24

Coors just paid out a dividend of $1.00 on its common stock, which is currently trading at $37.27. If dividends are paid annually and are expected to grow in value by 1% per annum forever, then what return will a shareholder earn if the stock is purchased today?

A)2.68%
B)2.71%
C)3.71%
D)5.03%
E)101.00%

Question 25

Discraft Inc. is expected to pay an annual dividend of $1 at the end of the current year. (Discraft pays its dividends annually.)The dividend is expected to grow quickly over the ensuing year at the rate of 20%. Starting two years from today the growth rate of dividends will fall to a rate of 3% and continue at that rate in perpetuity. Investors require a 12% return on the stock. Estimate the market price of the shares of Discraft in one year's time (at Year 1)just after the next dividend is paid.

A)$11.24
B)$11.62
C)$12.80
D)$13.33
E)$14.82

Question 26

Natalie is interested in valuing the shares of Union Aerospace (UA). UA pays dividends annually. She expects the stock to pay dividends of $3 at the end of each of the next four years. Thereafter, she expects the dividend to grow at 7% per annum in perpetuity. If her required return is 12%, then how much should she pay for a share?

A)$43.63
B)$45.54
C)$47.24
D)$49.91
E)$73.31

Question 27

Cherry Auto Sales just opened and does not expect to pay a dividend during its first year. At the end of its second year, Cherry's owners expect to pay a $2.00 dividend and plan to increase it 7% annually. If the required return is 20%, what should Cherry's stock price be?

A)$11.42
B)$10.92
C)$13.06
D)$12.82
E)$15.48

Question 28

Ramble-On-Rose Florists Inc. common shares are priced at $39.96 today and are expected to pay the next annual dividend of $1.85 in one year's time. Investors have historically required an 11% return for holding Ramble-On stock. Assume that the dividends grow at a constant rate in perpetuity, and calculate the growth rate implicit in today's stock price. Then, calculate the fair price for the stock after the $1.85 dividend in one year's time. Finally, calculate the capital gain rate. That is, the percentage change in the stock price between today and one year from now.

A)4.63%, $30.39, 31.50%
B)4.63%, $40.64, 5.38%
C)6.37%, $39.96, 0.00%
D)6.37%, $42.55, 6.37%
E)6.37%, $42.55, 6.48%

Question 29

Use the following information about Molson Coors, Anheuser-Busch and Heineken to answer the following question. Selected Financial Information for selected brewing companies
(All values in millions. Currency = US Dollars.)
$\begin{array}{|l|l|l|l|} \hline& & \text { Anheuser } & \\& \text { Molson Coors } & \text { Busch } & \text { Heineken } \\\hline \text { Net Income } & \$ 675 \mathrm{M} & \$ 4,820 \mathrm{M} & \$ 1,981 \mathrm{M} \\\hline \text { \# Shares } & & & \\\text { Outstanding } & 187 \mathrm{M} & 1,590 \mathrm{M} & 563 \mathrm{M} \\\hline \text { Owner's Equity } & \$ 7,799 \mathrm{M} & \$ 35,259 \mathrm{M} & \$ 14,114 \mathrm{M} \\\hline \text { Price } & \$ 39 & \$ 54 & \$ 50\\\hline\end{array}$ Which stock is cheapest relative to earnings?

A)Molson Coors Co.
B)Anheuser-Busch
C)Heineken
D)All three are equally valued.

Question 30

The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20%, what should be the stock's market value?

A)$150
B)$100
C)$50
D)$25
E)$10

Question 31

Wayne Enterprises Inc. pays a regular annual dividend on its common shares which is expected to grow annually in perpetuity at the rate of 3%. Today is Dec 31 and Wayne pays its dividend on January 1 (tomorrow). Last year, the dividend was $0.75 per share. Ignoring settlement, taxes and other institutional issues, what is a fair price for the stock today if investors expect an annual return of 9%?

A)$12.88
B)$13.26
C)$13.41
D)$13.63
E)$14.03

Question 32

Amazon.com Inc. does not currently pay a dividend. Analysts expect Amazon to commence paying annual dividends in three years. The first dividend is expected to be $2 per share. Dividends are expected to grow from that point at an annual rate of 4% in perpetuity. Investors expect a 12% return from the stock. What should the price of the stock be today?

A)$19.93
B)$21.37
C)$22.03
D)$22.32
E)$25.00

Question 33

________ is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock)are divided among common stockholders.

A)Liquidation value
B)Book value
C)The P/E multiple
D)The present value of the common stock

Question 34

Molson Coors has expected earnings per share of $4.47. Financial data for its two closest competitors are given in the table below. If their average performance (and valuation)represents the best benchmark for Molson Coors, then what is the best estimate of Molson Coors' fair stock price? Selected Financial Information for selected brewing companies
(All values in millions. Currency = US Dollars.)
$$\begin{array} { | l | l | l| } \hline & \begin{array} { l } \text { Anheuser } \\\text { Busch }\end{array} & \\&& \text { Heineken } \\\hline \text { Net Income } & \$ 4,820 \mathrm { M } & \$ 1,981 \mathrm { M } \\\hline \text { \# Shares } & & \\\text { Outstanding } & 1,590 \mathrm { M } & \$ 63 \mathrm { M } \\\hline \text { EPS } & 3.0314 & 3.5187 \\\hline \text { Price } & \$ 54 & \$ 50 \\\hline\end{array}$$

A)$52.00
B)$53.46
C)$63.52
D)$71.56
E)$79.63

Question 35

________ is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

A)Liquidation value
B)Book value
C)The P/E multiple
D)The present value of the dividends

Question 36

Stanley Company pays out 35% of its annual earnings to its common shareholders in the form of a dividend. Earnings per share are expected to be $3.25 at the end of this year and are expected to grow at 2% per annum perpetually. If you require a return of 8% on this investment, how much are you willing to pay for the stock?

A)$18.96
B)$19.34
C)$43.55
D)$54.17
E)$55.25

Question 37

Nike's common shares are currently trading at $57.12. Dividends on this stock are paid annually and are expected to grow at 2% per annum in perpetuity. Shareholders required return on this investment of 3%. The most recent dividend was paid yesterday and the next dividend will be paid in one year. How big was yesterday's dividend?

A)$0.55
B)$0.56
C)$0.57
D)$0.60
E)$0.62

Question 38

Consider trying to value a company called Etail.com on January 1. It pays dividends annually on Dec. 31. Yesterday's dividend was $1. Dividends are expected to grow for the next 2 years at 10% and then settle down to a long-run growth rate of 5% in perpetuity. Because of the initial riskiness of the company, investors required a 20% rate of return over the first 2 years, but only a 12% rate of return thereafter. What is the fair price for the stock today, January 1?

A)$13.76
B)$36.77
C)$14.36
D)$12.75
E)$14.96

Question 39

If the expected rate of return on a stock exceeds the required rate:

A)The stock is experiencing supernormal growth.
B)The stock should be sold.
C)The company is probably not trying to maximize price per share.
D)The stock is a good buy.
E)Dividends are not being declared.

Question 40

Because common stockholders have a right to the cash flows remaining after all claims on the corporation have been satisfied, they are known as:

A)Preferred shareholders.
B)Fiduciary claimants.
C)Limited liability participants.
D)Residual claimants.
E)Principal shareholders.

Question 41

Betty is contemplating purchasing shares in Daily Bugle Corp. and holding them for 2 years, at which time she will sell them. The market price of these shares is expected to be $36.50 in two years (after the second dividend). The next two annual dividends are expected to be: D1=$1.00 and D2=$1.20. The first dividend will be paid on one year and the second in two years. Betty requires a return of 11%. What is the maximum price Betty is willing to pay for shares in this company?

A)$30.53
B)$30.60
C)$31.33
D)$31.50
E)$31.99

Question 42

A stock just paid a dividend of $1.15, has a required rate of return of 17%, and a constant dividend growth rate of 3%. What price should this stock be selling for?

A)$17.08
B)$8.21
C)$8.46
D)$1.22
E)$6.05

Question 43

A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________.

A)$22.50/share
B)$9/share
C)$90/share
D)$30/share

Question 44

The use of which of the following valuation methods, utilized in valuing common stock, is superior since it considers expected earnings?

A)Liquidation value
B)Book value
C)P/E multiple
D)Present value of the interest

Question 45

Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.

A)$28.00
B)$56.00
C)$22.40
D)$18.67

Question 46

A common stock currently has a beta of 1.3, the risk-free rate is an annual rate of 6 percent, and the market return is an annual rate of 12 percent. The stock is expected to generate per-share benefits of $5.20 during the coming period. A toxic spill results in a lawsuit and potential fines, and the beta of the stock jumps to 1.6. Assuming zero growth the new equilibrium, price of the stock ________.

A)will be $37.68
B)will be $43.33
C)will be $33.33
D)cannot be determined from the information given

Question 47

Microsoft Inc.'s dividends are expected to grow at a rate of 1% per year in perpetuity. If the appropriate rate of return on such investments is 11% and the price of a Microsoft share is $20.20, then what is the consensus market estimate of the next dividend? (Assume that next dividend will be paid in one year.)

A)$2.02
B)$2.22
C)$2.12
D)$2.17
E)$2.24

Question 48

A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is:

A)$120
B)$10
C)$12
D)$100

Question 49

In the Gordon model, the value of the common stock is the:

A)Net value of all assets which are liquidated for their exact accounting value.
B)Actual amount each common stockholder would expect to receive should the firm's assets be liquidated at fair market value.
C)Present value of a non-growing dividend stream.
D)Present value of a constant, growing dividend stream.

Question 50

Worldwide Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting a period (2 years)of extraordinary growth (20%), followed by another 2 years of unusual growth (10 %), and finally a normal (sustainable)growth rate of 6% annually. If the last dividend was D(0)= $1.00 per share and the required rate is 8%, what should the market price be today?

A)$93.70
B)$72.76
C)$99.66
D)$98.57
E)$68.87

Question 51

Assume that the average firm in your company's industry is expected to grow at a constant rate of 5%, and its dividend yield is 4%. Your company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads to expect that its earnings and dividends will grow at a rate of 40% this year and 25% the following year, after which growth should match the 5% industry average rate. The last dividend paid was $2. What is the value per share of your firm's stock?

A)$42.60
B)$82.85
C)$91.88
D)$101.15
E)$110.37

Question 52

Royal Bank common shares pay dividends annually. They just paid a $1.50 dividend. Stock holders require a return of 12%. Royal is expected to continue paying dividends that will grow at 3.5% per annum in perpetuity. What is the fair price of a share of Royal Bank stock?

A)$18.26
B)$12.50
C)$17.65
D)$18.90
E)$16.72

Question 53

Blockbuster Inc. just paid a dividend of $2 per share. Dividends are expected to grow at a rate of -50% annually over the next three years. After that, it is expected that Blockbuster will cease paying dividends forever. What is the fair market price for a share of Blockbuster if shareholders require a return of 12%?

A)$0
B)$1.47
C)$1.61
D)$2.21
E)$2.95

Question 54

Tootsie Roll Inc. pays annual dividends that are expected to grow in perpetuity at the rate of 2% per annum. The next dividend is expected to be $1.50 and it will be paid in one year. The price of Tootsie Roll shares is currently $21.43. If you pay that price and hold Tootsie Roll shares, then what return do you expect to earn?

A)9%
B)8%
C)7%
D)10%
E)11%

Question 55

In 2001, Ryder Corp. paid a dividend of $2.20. In 1995, Ryder paid a dividend of $1.50. What is Ryder's dividend growth rate?

A)47%
B)70%
C)10%
D)8%
E)12%

Question 56

Cyberdyne Systems just paid a dividend of $1.32 on its common stock, and the next dividend will be paid one year from now. You require a return of 6%. What is the market price of this stock if dividends are paid annually in perpetuity and grow at the rate of 2.62% per year forever?

A)$15.31
B)$15.71
C)$22.58
D)$39.05
E)$40.08

Question 57

Mammoth Mart's common shares are currently trading for $59.85 and the company paid its annual dividend of $0.60 per share. If your required rate of return is 12%, what is the implied growth rate in dividends? (Assume that dividends are expected to grow at a constant rate in perpetuity.)

A)1.00%
B)8.46%
C)10.89%
D)11.00%
E)11.46%

Question 58

Google has just declared a dividend of $2.12 on its common stock. Dividends are paid annually. Dividends are expected to grow at the rapid pace of 10% for the next 4 years, after which growth is expected to slow to 3% per annum forever. During the rapid growth phase, the required return on this investment will be 20%, and it is expected to drop to 12% when growth slows. What is the current market value of this stock?

A)$19.73
B)$23.98
C)$25.33
D)$29.43
E)$74.70

Question 59

ABC Company has been growing at a 10% rate, and it just paid a dividend of Do= $3.00. Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth rate, to 20% annually for the next 2 years. After this time growth is expected to return to the long-run constant rate of 10%. The company's beta is 2.0, the required return on an average stock is 11%, and the risk free rate is 7%. What should the dividend yield (D1/Po)be today? (Round to the nearest whole percent.)

A)4%
B)5%
C)10%
D)8%
E)2%

Question 60

The Blockbuster business model is slowly dying and so Blockbuster's dividends are expected to grow at a rate of -2% per annum in perpetuity. Blockbuster just (yesterday)paid a dividend of $2.00 per share. Blockbuster pays dividends annually. Stock holders require a rate of return of 10%. What is the fair stock price for Blockbuster today?

A)$16.33
B)$25.50
C)$17.00
D)$24.50
E)$16.49

Question 61

A share of common stock has an expected long-run constant growth rate of 10 percent and is currently priced at $66 per share. If investors require 15% rate of return, what was the last dividend paid on the stock?

A)$2.20
B)$1.95
C)$6.15
D)$3.00
E)$3.30

Question 62

The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends)will decline at a rate of 5% annually forever. Assume that Ks = 11% and Do = $2.00. What will the price of the company's stock be three years from now?

A)$27.17
B)$6.23
C)$28.50
D)$10.18
E)$20.63

Question 63

Dividends are usually paid:

A)Annually
B)Semiannually
C)Three times a year
D)Quarterly
E)Monthly

Question 64

Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years. After 3 years, dividends are expected to grow at a 10% annual rate forever. The last dividend was $2, and the required rate of return is 20%. What should be the current market value of EFB stock?

A)$13.46
B)$14.51
C)$15.22
D)$16.03
E)$16.95

Question 65

The last dividend of SPirex Corporation's common stock was $4.00, and the expected growth is 10 percent. If you require a rate of return of 20%, what is the highest price you should be willing to pay for this stock?

A)$44.00
B)$38.50
C)$40.00
D)$45.69
E)$50.00

Question 66

If the average PE ratio for the construction industry is 15 and earnings per share for Lincoln Builders is $2.35, what is the current price of Lincoln's stock?

A)$17.35
B)$6.38
C)$35.25
D)$0.16
E)$17.63

Question 67

The price/earnings ratio:

A)Is calculated by multiplying the market price of a stock by its earnings per share.
B)Is found by dividing the market price of a stock by the firm's total earnings.
C)Is computed by dividing the book value of a stock by the firm's EPS.
D)Is calculated by adding the market price of a stock to the firm's EPS.
E)Is found by dividing the market price of a stock by the firm's EPS.

Question 68

Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?

A)To a buyer the asset's value represents the minimum price that he or she would pay.
B)To a seller the asset's value represents the maximum sale price.
C)To a buyer the asset's value represents the maximum price that he or she would pay.
D)The interaction of buyers and sellers can result in a value that differs from the price of the asset.

Question 69

A firm has just paid an annual dividend of $3.00 per share of common stock. If the expected long-run growth rate for this firm is 10%, and if you require an annual rate of return of 16%, how much should you be willing to pay for a share of this stock?

A)$61
B)$49
C)$58
D)$35
E)$55

Question 70

The basic assumption of the Gordon growth model is that:

A)Dividends will grow at a faster rate than the required return.
B)No earnings will be retained by the firm to finance growth prospects.
C)Bonds are perfect substitutes for common stock.
D)Dividend payments will grow at a constant rate.
E)The firm will never pay dividends.

Question 71

Baldwin Corp. just paid a dividend of $2.00. Over the next two years, this dividend is expected to growth by 20% per year. After two years, dividend growth is expected to level off at 10%. If the required rate of return on Baldwin stock is 12%, what should be the price of Baldwin stock today?

A)$130.72
B)$128.57
C)$158.40
D)$31.68
E)$163.68

Question 72

Given the following information, calculate the expected capital gains yield for Chicago Bears Inc.: beta = 0.6; Km = 15%; Krf = 8%; D1 = $2.00: Po =$25.00. Assume the stock is in equilibrium and the exhibits constant growth.

A)3.8%
B)0%
C)8.0%
D)4.2%
E)12.2%

Question 73

Leonardo's broker called him recently with an offer to buy Downliner Waterproof Furnishings Corp. common stock for $40 per share. His broker promised to repurchase the shares in one year for $45 per share. If Leonardo accepts this deal, what is his required return? The stock is not expected to pay a dividend next year.

A)15.3%
B)10.0%
C)30.6%
D)15.1%
E)12.5%

Question 74

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14% rate of return, what is the current dividend of this stock?

A)$3.00
B)$3.30
C)$4.29
D)$4.75
E)$6.13

Question 75

Assuming g will stay constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

A)g = 0
B)g > 0
C)g < 0
D)Never

Question 76

Assume that the stock of Perry Corporation has just paid an annual dividend of $5, and that this dividend is expected to grow for the next 2 years at an annual growth rate of 20%, and then grow indefinitely at an annual growth rate of 10%. If the risk-free rate is 5%, the expected return on the market is 15%, and the firm's beta is 0.80, how much should you be willing to pay for this stock?

A)$203.28
B)$217.70
C)$256.81
D)$315.09
E)$360.25

Question 77

Eastern Auto Parts' last dividend was Do = $0.50, and the company expects to experience no growth in the next 2 years. However eastern will grow at an annual rate of 5% in the third and fourth years, and, beginning with the fifth year, it should attain a 10% growth rate which it should sustain thereafter. Eastern has a cost of capital of 12%. What should be the present price per share of Eastern common stock?

A)$19.26
B)$31.87
C)$30.30
D)$20.84
E)$19.95

Question 78

NYC Company has decided to make a major investment. The investment will require a substantial early cash outflow, and inflows will be relatively late. As a result, it is expected that the impact on the firm's earnings for the first 2 years will cause a negative growth of 5% annually. Further, it is anticipated that the firm will then experience 2 years of zero growth, after which it will begin a positive annual sustainable growth of 6%. If the firm's required return is 10% and its last dividend, D(0), was $2 per share, what should be the current price per share?

A)$32.66
B)$47.83
C)$53.64
D)$38.48
E)$42.49

Question 79

The use of the ________ is especially helpful in valuing firms that are not publicly traded.

A)liquidation value
B)book value
C)P/E multiple
D)present value of the dividends

Question 80

________ is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

A)Liquidation value
B)Book value
C)The P/E multiple
D)The present value of the dividends