Question 1

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?
A) $2,572,125
B) $2,707,500
C) $2,850,000
D) $3,000,000
E) $3,150,000

Accepted Answer

The answer of Suppose Boyson Corporation's projected free cash flow...

Question 2

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
A) $2.20
B) $2.44
C) $2.69
D) $2.96
E) $3.25

Accepted Answer

We can use the constant growth model to solve for the expected dividend:

D1 = D0 * (1 + g)

where:

D0 = current dividend
g = expected growth rate

First, we need to solve for the current dividend, D0. We know that the stock currently sells for $57.50 per share and has a required rate of return of 10.25%. This means that the current dividend yield is:

Dividend Yield = D0 / Price

0.1025 = D0 / $57.50

D0 = $5.8938

We can round this to $5.89 for convenience.

Now we can use the constant growth model:

D1 = $5.89 * (1 + 0.06)
D1 = $6.244

We can round this to $6.24.

Therefore, the expected year-end dividend, D1, is $2.44 (Choice B).

Question 3

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?
A) $37.86
B) $38.83
C) $39.83
D) $40.85
E) $41.69

Accepted Answer

The answer of Reddick Enterprises' stock currently sells for $35.50...

Question 4

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
A) $40.17
B) $41.20
C) $42.26
D) $43.34
E) $44.46

Accepted Answer

The answer of Whited Inc.'s stock currently sells for $35.25...

Question 5

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?
A) $104.27
B) $106.95
C) $109.69
D) $112.50
E) $115.38

Accepted Answer

The answer of Molen Inc. has an outstanding issue of...

Question 6

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
A) $0.95
B) $1.05
C) $1.16
D) $1.27
E) $1.40

Accepted Answer

The answer of Goode Inc.'s stock has a required rate...

Question 7

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?
A) $1,895
B) $1,995
C) $2,100
D) $2,205
E) $2,315

Accepted Answer

To calculate the corporate value of the firm, we can use the Gordon Growth Model formula:

Corporate value = (FCF / (WACC - growth rate))

Plugging in the given values:

Corporate value = (150 / (0.125 - 0.05))
= 2,100 million

Therefore, the answer is option C, $2,100 million.

Question 8

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?
A) $18.62
B) $19.08
C) $19.56
D) $20.05
E) $20.55

Accepted Answer

The answer of The Isberg Company just paid a dividend...

Question 9

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?
A) 6.01%
B) 6.17%
C) 6.33%
D) 6.49%
E) 6.65%

Accepted Answer

The answer of Gay Manufacturing is expected to pay a...

Question 10

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?
A) $23.11
B) $23.70
C) $24.31
D) $24.93
E) $25.57

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.50 \
\mathrm{r}_{\mathrm{s}} & 10.1 \% \
\mathrm{~g} & 4.0 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.56 \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 25.57
\end{array}$

Question 11

The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?
A) $28.90
B) $29.62
C) $30.36
D) $31.12
E) $31.90

Accepted Answer

The answer of The Francis Company is expected to pay...

Question 12

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?
A) 6.50%
B) 6.83%
C) 7.17%
D) 7.52%
E) 7.90%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.50 \
\mathrm{~g} & 6.5 \% \
\mathrm{P}_{0} & \$ 56.00 \
\text { Capital gains yield }=\mathrm{g}= & 6.50 \%
\end{array}$

Question 13

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?
A) 7.54%
B) 7.73%
C) 7.93%
D) 8.13%
E) 8.34%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 5.5 \% \
\mathrm{P}_{0} & \$ 44.00 \
\text { Total return }=r_{\mathrm{S}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 8.34 \%
\end{array}$

Question 14

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?
A) 4.42%
B) 4.66%
C) 4.89%
D) 5.13%
E) 5.39%

Accepted Answer

To calculate the expected dividend yield, we need to divide the expected dividend (D1) by the stock price (P0).
D1 can be calculated as follows:
D1 = D0 * (1+g) = 2.25 * (1+0.035) = $2.33
So, the expected dividend yield = D1/P0 = 2.33/50 = 0.0466 or 4.66% (Option B)

Question 15

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?
A) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
B) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
C) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
D) The stocks must sell for the same price.
E) Stock Y must have a higher dividend yield than Stock X.

Accepted Answer

According to the constant growth model, the required return on a stock is equal to the dividend yield plus the expected capital gains yield. Assuming the same risk, the higher the expected growth rate of the stock, the higher the required return on that stock. Therefore, if Stock Y has a lower expected dividend yield but a higher required return, it must have a higher expected growth rate.

Question 16

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
A) $14.52
B) $14.89
C) $15.26
D) $15.64
E) $16.03

Accepted Answer

The answer of Schnusenberg Corporation just paid a dividend of...

Question 17

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?
A) 4.12%
B) 4.34%
C) 4.57%
D) 4.81%
E) 5.05%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 4.7 \% \
\mathrm{P}_{0} & \$ 26.00 \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}= & 4.81 \%
\end{array}$

Question 18

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?
A) 8.37%
B) 8.59%
C) 8.81%
D) 9.03%
E) 9.27%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.75 \
\mathrm{~g} & 3.6 \% \
\mathrm{P}_{0} & \$ 32.00 \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.81 \
\text { Total return }=\mathrm{r}_{\mathrm{s}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 9.27 \%
\end{array}$

Question 19

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
A) $16.28
B) $16.70
C) $17.13
D) $17.57
E) $18.01

Accepted Answer

The answer of A share of common stock just paid...

Question 20

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
A) $17.39
B) $17.84
C) $18.29
D) $18.75
E) $19.22

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 0.75 \
\mathrm{r}_{\mathrm{s}} & 10.5 \% \
\mathrm{~g} & 6.4 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 18.29
\end{array}$

Quiz 10: Stocks

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) . The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?