Question 1

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 2

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 3

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 4

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

The expected dividend yield can be calculated using the formula D1/P0, where D1 is the expected dividend for the coming year.

We can calculate D1 by multiplying D0 by (1+g), since g is the constant growth rate: 
D1 = D0 * (1+g) 
D1 = 2.25 * (1+0.035) 
D1 = 2.3369

Now, we can calculate the expected dividend yield: 
Expected dividend yield = D1/P0 
Expected dividend yield = 2.3369/50 
Expected dividend yield = 0.0467 or 4.67%

The closest option to this answer is B: 4.66%, which is the best choice.

Question 5

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 6

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.
Multiple Choice: Problems
Most of these problems are straightforward and only moderately difficult. However, a few of the later ones are relatively difficult and should be used primarily on take-home exams for students with some experience with Excel. Problems with * in the topic line are nonalgorithmic.

Accepted Answer

According to the dividend discount model, the required return of a stock can be decomposed into two parts: the expected dividend yield and expected capital gains yield. The expected dividend yield is determined by the current dividend and the price of the stock, while the expected capital gains yield is determined by the expected growth rate of the dividend. Therefore, if Stock Y has the lower expected dividend yield, it must have the higher expected growth rate to achieve the same required return as Stock X, assuming that the market is in equilibrium.

Question 7

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 8

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 9

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

Using the constant growth model, we can find the expected dividend, D1, as follows:
D1 = D0(1+g)
where D0 is the current dividend and g is the expected growth rate.
First, we need to find the current dividend, D0. We can use the dividend yield formula to do so:
Dividend Yield = D0/Current Stock Price
0.06 = D0/$57.50
D0 = $3.45
Now, we can use the constant growth model to find the expected year-end dividend, D1:
D1 = $3.45(1+0.06) = $3.45(1.06) = $3.657 = $2.44 (rounded to the nearest cent)
Therefore, the best choice is B, with an expected year-end dividend of $2.44.

Question 10

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 11

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 12

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 13

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 14

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 15

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 16

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

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

Question 17

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

Using the formula for the constant growth model of free cash flow valuation:
Corporate value = FCF0 x (1 + g) / (WACC - g)

Corporate value = $150m x (1 + 0.05) / (0.125 - 0.05)
Corporate value = $2,100m

Therefore, the firm's total corporate value is $2,100 million, which is option C.

Question 18

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 19

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 20

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...

Quiz 9: Stocks

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?

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?

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

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?

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) = 5.5%, and P0 = $44, 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?

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?

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?

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?

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?

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 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?

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?

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?

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?