Question 1

If a company has a current stock price of $50, an EPS of $1.75/share; EPS growth rate of 20% and the investors rate of return is 13%, calculate the cash cow price.

Accepted Answer

The cash cow price is calculated as the EPS divided by the difference between the investor's rate of return and the EPS growth rate. In this case, the EPS is $1.75, the investor's rate of return is 13%, and the EPS growth rate is 20%. Therefore, the cash cow price is $1.75 / (0.13 - 0.20) = $13.46.

Question 2

Mahenterin Inc. is expecting to pay $1.23, $0.99, and $1.13 in annual dividends for the next three years respectively. After that, it projects that dividends will increase by 1.5% annually. Andy is in the 25% marginal tax bracket and wants to earn 6% after-tax on his investments. How much is Andy willing to pay today for one share of Mahenterin Inc. stock?

Accepted Answer

The correct answer is A because $16.90 is the present value of the expected dividends, discounted at 6% after-tax.

Question 3

How much are you willing to pay today for one share of stock if the company just paid a $1.40 annual dividend, the dividends increase by 4% annually, and you require a 12% rate of return?

Accepted Answer

The answer of How much are you willing to pay...

Question 4

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As its target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given a required return of 12%, the stock should today should sell for:

Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model for declining dividends): P = D1 / (r - g), where D1 = D0 * (1 + g). Here, D0 = $2.50, g = -4% or -0.04, and r = 12% or 0.12. First, calculate D1 = $2.50 * (1 - 0.04) = $2.40. Then, P = $2.40 / (0.12 + 0.04) = $15.00.

Question 5

Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to pay to buy one share of this stock today?

Accepted Answer

The correct answer is B. The maximum amount you are willing to pay to buy one share of this stock today is $13.33. This is because the constant dividend is $2.00 and the required rate of return is 15%. Therefore, the maximum price you are willing to pay is $2.00 / 0.15 = $13.33.

Question 6

Alhandro, Inc. just paid an annual dividend of $1.03. It has been increasing its dividends by 4% annually and is expected to continue doing so. How much can it expect to receive for each new share of stock offered if investors require an 11% rate of return?

Accepted Answer

The answer of Alhandro, Inc. just paid an annual dividend...

Question 7

If a company has a current stock price of $40, an EPS of $1.5/share; EPS growth rate of 15% and the investors rate of return is 10%, calculate the cash cow price.

Accepted Answer

The answer of If a company has a current stock...

Question 8

If a company has a current stock price of $37, an EPS of $2.25/share; EPS growth rate of 15% and the investors rate of return is 15%, calculate the cash cow price.

Accepted Answer

The answer of If a company has a current stock...

Question 9

Noshima Industries issued dividends totaling $0.60 last year. For the next two years, it expects dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Noshima Industries stock worth today if you require a 9% rate of return?

Accepted Answer

To find the stock price today, calculate the dividends for the next two years and the constant dividend thereafter. Year 1 dividend: $0.60 * 1.50 = $0.90. Year 2 dividend: $0.90 * 1.50 = $1.35. From Year 3 onwards, the dividend remains $1.35. The stock price is the present value of these dividends: PV = $0.90/(1.09) + $1.35/(1.09^2) + $1.35/(0.09 * 1.09^2) = $14.59.

Question 10

Last week, N&M Railroad paid its annual dividend of $1.50 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 15%?

Accepted Answer

The stock price can be calculated using the Gordon Growth Model for a declining dividend, which is P = D1 / (r - g). Here, D1 = $1.50 * (1 - 0.10) = $1.35, r = 0.15, and g = -0.10. So, P = $1.35 / (0.15 + 0.10) = $5.40.

Question 11

You have decided that you would like to own some shares of Martin & Miller (M&M) but need an expected 15% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend today to buy one share of M&M stock if the company pays a constant $3 annual dividend per share?

Accepted Answer

The maximum amount you would be willing to spend today to buy one share of M&M stock, given a required rate of return of 15% and a constant annual dividend of $3, can be calculated using the dividend discount model for a perpetuity: Price = Dividend / Required Rate of Return. Thus, Price = $3 / 0.15 = $20.00.

Question 12

Marty Corporation's next dividend and stock price are expected to be $3 and $15 respectively. If the investor's rate of return is 10%, determine the stock price now.

Accepted Answer

The stock price now can be calculated using the dividend discount model: P0 = (D1 + P1) / (1 + r). Here, D1 = $3, P1 = $15, and r = 0.10. So, P0 = ($3 + $15) / 1.10 = $16.36.

Question 13

If a company has a current stock price of $25, an EPS of $2.75/share; EPS growth rate of 15% and the investors rate of return is 20%, calculate the cash cow price.

Accepted Answer

The answer of If a company has a current stock...

Question 14

Talon Corp. just paid a dividend of $1.50 per share. The dividends have been growing at 5% per year. If the required return is 12%, what was the price of the stock three years ago?

Accepted Answer

To find the price of the stock three years ago, we first calculate the present value of the dividends. The dividend just paid is $1.50, growing at 5% per year. The dividend next year (D1) will be $1.50 * (1 + 0.05) = $1.575. The price of the stock today (P0) can be calculated using the Gordon Growth Model: P0 = D1 / (r - g), where r is the required return (12% or 0.12) and g is the growth rate (5% or 0.05). So, P0 = $1.575 / (0.12 - 0.05) = $22.50. To find the price three years ago, we discount this price back three years using the required return of 12%. The price three years ago (P-3) = P0 / (1 + r)^3 = $22.50 / (1 + 0.12)^3 = $22.50 / 1.404928 = $16.01, which is not an option provided. However, the correct approach to find the price three years ago directly from the dividend three years before the current dividend would involve calculating the dividend three years ago and then applying the Gordon Growth Model formula. Given the mistake in the initial calculation, let's correctly calculate the price three years ago based on the dividend growth model, considering the dividend growth and the time frame correctly:First, find the dividend three years ago, which would be D0 / (1 + g)^3. However, since we started with the dividend that was just paid (D0), we need to adjust our approach to find the price directly three years ago based on the given information and the correct formula application.The correct calculation should involve adjusting the dividend back three years and then applying the Gordon Growth Model or correctly applying the formula based on the future value of the dividends and discounting it back to the present value three years ago. Given the error in the initial explanation and calculation, the correct answer should involve recalculating based on the dividend growth rate and the required return, properly applying the dividend discount model (DDM) for a growing dividend, which is P = D / (r - g). However, without recalculating based on the initial mistake, the correct process involves understanding the growth rate, the required return, and how they impact the stock price calculation over time, which was not accurately reflected in the initial response. The correct calculation directly from the dividend paid three years ago or correctly applying the growth rates and discounting back would lead to the correct answer, but the initial explanation failed to accurately calculate or provide the correct formula application for the scenario described.

Question 15

Kettle Korn, Inc. just paid a $1.40 per share annual dividend. The company is planning on paying $1.50, $1.65, $1.90, and $2.00 a share over the next 4 years, respectively. After that, the dividend will be a constant $2.25 per share per year. What is the market price of this stock if the market rate of return is 12%?

Accepted Answer

The answer of Kettle Korn, Inc. just paid a $1.40...

Question 16

The Brown Company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay for one share of the Brown Company stock if you require a 12% rate of return?

Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing dividend), which is P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $1.68, r = 12% or 0.12, and g = 2.5% or 0.025. Plugging in these values gives P = $1.68 / (0.12 - 0.025) = $17.68.

Question 17

Franktown Meats just announced that they are increasing the annual dividend to $1.75 and establishing a policy whereby the dividend will increase by 2% annually thereafter. How much will one share of this stock be worth six years from now if the required rate of return is 14.5%?

Accepted Answer

The correct answer is D because the dividend will increase by 2% annually, so the dividend in six years will be $1.75 * (1.02)^6 = $1.95. The stock price can be calculated using the dividend discount model: Price = Dividend / (Required Rate of Return - Dividend Growth Rate). Plugging in the values, we get Price = $1.95 / (0.145 - 0.02) = $15.77.

Question 18

Uptown Homes just paid a $1.60 annual dividend. This dividend is expected to increase by 3% per year. If you are planning on buying 1,000 shares of this stock one year from now, how much should you expect to pay per share if the market rate of return for this type of security is 13.5% at the time of your purchase?

Accepted Answer

The answer of Uptown Homes just paid a $1.60 annual...

Question 19

The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.21. If the required rate of return is 12%, what will the stock sell for one year from now?

Accepted Answer

The stock price one year from now can be calculated using the dividend discount model for a stock with constant growth: $ P_1 = \frac{D_0 \times (1 + g)}{r - g} $, where $P_1$ is the price one year from now, $D_0$ is the most recent dividend, $g$ is the growth rate, and $r$ is the required rate of return. Plugging in the given values: $ P_1 = \frac{6.21 \times (1 + 0.07)}{0.12 - 0.07} = 142.20 $.

Question 20

If a company has a current stock price of $75, an EPS of $2/share; EPS growth rate of 10% and the investors rate of return is 12%, calculate the cash cow price.

Accepted Answer

The cash cow price can be calculated using the formula: Cash Cow Price = EPS * (1 + g) / (r - g), where EPS is the earnings per share, g is the growth rate, and r is the required rate of return. Plugging in the values: Cash Cow Price = $2 * (1 + 0.10) / (0.12 - 0.10) = $2.2 / 0.02 = $110. However, since none of the provided options match this calculation, it appears there may have been a misunderstanding in the question or options provided. Based on the calculation method and the options given, there seems to be a mistake in my response or the options listed.

Quiz 8: Stock Valuation

If a company has a current stock price of $50, an EPS of $1.75/share; EPS growth rate of 20% and the investors rate of return is 13%, calculate the cash cow price.

How much are you willing to pay today for one share of stock if the company just paid a $1.40 annual dividend, the dividends increase by 4% annually, and you require a 12% rate of return?

Alhandro, Inc. just paid an annual dividend of $1.03. It has been increasing its dividends by 4% annually and is expected to continue doing so. How much can it expect to receive for each new share of stock offered if investors require an 11% rate of return?

If a company has a current stock price of $40, an EPS of $1.5/share; EPS growth rate of 15% and the investors rate of return is 10%, calculate the cash cow price.

If a company has a current stock price of $37, an EPS of $2.25/share; EPS growth rate of 15% and the investors rate of return is 15%, calculate the cash cow price.

Noshima Industries issued dividends totaling $0.60 last year. For the next two years, it expects dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Noshima Industries stock worth today if you require a 9% rate of return?

Last week, N&M Railroad paid its annual dividend of $1.50 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 15%?

Marty Corporation's next dividend and stock price are expected to be $3 and $15 respectively. If the investor's rate of return is 10%, determine the stock price now.

If a company has a current stock price of $25, an EPS of $2.75/share; EPS growth rate of 15% and the investors rate of return is 20%, calculate the cash cow price.

Talon Corp. just paid a dividend of $1.50 per share. The dividends have been growing at 5% per year. If the required return is 12%, what was the price of the stock three years ago?

The Brown Company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay for one share of the Brown Company stock if you require a 12% rate of return?

Franktown Meats just announced that they are increasing the annual dividend to $1.75 and establishing a policy whereby the dividend will increase by 2% annually thereafter. How much will one share of this stock be worth six years from now if the required rate of return is 14.5%?

The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.21. If the required rate of return is 12%, what will the stock sell for one year from now?

If a company has a current stock price of $75, an EPS of $2/share; EPS growth rate of 10% and the investors rate of return is 12%, calculate the cash cow price.