Question 1

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?

Accepted Answer

The correct answer is A. The current stock price, P0, can be calculated using the Gordon Growth Model:P0 = D1 / (r - g)where:D1 = the expected dividend in one year = $0.75 * (1 + 5.50%) = $0.7913r = the required rate of return = risk-free rate + beta * market risk premium = 4.00% + 1.15 * 5.00% = 9.75%g = the constant growth rate of dividends = 5.50%Plugging in the values, we get:P0 = $0.7913 / (0.0975 - 0.0550) = $18.62Therefore, the company's current stock price is $18.62.

Question 2

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?

Accepted Answer

The correct answer is A because the current stock price is $14.52. This can be calculated using the Gordon Growth Model, which is:P0 = D0 / (r - g)where:P0 is the current stock priceD0 is the most recent dividend paidr is the required returng is the constant growth rateIn this case, we have:D0 = $0.75r = 10.50%g = 6.50%Plugging these values into the formula, we get:P0 = $0.75 / (0.1050 - 0.0650) = $14.52

Question 3

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?

Accepted Answer

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

Question 4

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?

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 5

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?

Accepted Answer

Using the constant growth model, we can calculate the expected year-end dividend as follows:
D1 = D0 x (1 + g)
Where:
D0 = the current dividend
g = the expected growth rate
Substituting the given values:
D1 = $2.00 x (1 + 0.06) = $2.12
Next, we can use the dividend discount model (DDM) to calculate the stock's intrinsic value:
V0 = D1 / (r - g)
Where:
V0 = the intrinsic value of the stock
r = the required rate of return
Substituting the given values:
V0 = $2.12 / (0.1025 - 0.06) = $57.50
The calculated intrinsic value matches the current stock price, which indicates that the stock is fairly priced. Therefore, the expected year-end dividend is $2.44 (Option B).

Question 6

Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, what is the horizon, or continuing, value in millions at t = 3?

Accepted Answer

The answer of Misra Inc. forecasts a free cash flow...

Question 7

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?

Accepted Answer

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

Question 8

Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5?

Accepted Answer

The answer of Gupta Corporation is undergoing a restructuring, and...

Question 9

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

The intrinsic value of the firm is calculated using the formula for the value of a growing perpetuity: Value = FCF1 / (WACC - growth rate). Substituting the given values: Value = $75 million / (0.10 - 0.05) = $1,500 million. Subtract the long-term debt and preferred stock: $1,500 million - $200 million = $1,300 million. Divide by the number of shares: $1,300 million / 30 million shares = $43.33 per share.

Question 10

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?

Accepted Answer

First, we need to calculate the terminal value (TV) of the company using the Gordon growth model:

TV = FCF1 / (WACC - g)

Where:
FCF1 = expected free cash flow at the end of year 1 = FCF0 * (1 + g) = $150 million * (1 + 5%) = $157.5 million
WACC = weighted average cost of capital = 12.5%
g = expected growth rate = 5%

TV = $157.5 million / (12.5% - 5%) = $1,575 million

Next, we can calculate the total corporate value by discounting the FCF and the TV back to present value:

FCF0 = $150 million
FCF1 = $157.5 million
TV = $1,575 million

PV(FCF0) = FCF0 / (1 + WACC)^0 = $150 million
PV(FCF1) = FCF1 / (1 + WACC)^1 = $141.43 million
PV(TV) = TV / (1 + WACC)^1 = $1,228.57 million

Total corporate value = PV(FCF0) + PV(FCF1) + PV(TV) = $1,519 million

Thus, the correct answer is choice letter C.

Question 11

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?

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 12

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

Accepted Answer

The correct answer is A because the expected stock price in 7 years is $37.52. This can be calculated using the formula: P7 = D1 / (rs - g) * (1 + g)^7, where D1 is the expected year-end dividend, rs is the required return, g is the growth rate, and P7 is the expected stock price in 7 years.

Question 13

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?

Accepted Answer

The correct answer is A because the current stock price is $28.90. This can be calculated using the Gordon Growth Model, which is:Stock Price = Dividend / (Required Rate of Return - Growth Rate)Required Rate of Return = Risk-Free Rate + Beta * Market Risk PremiumRequired Rate of Return = 4.00% + 1.15 * 5.50% = 9.28%Stock Price = $1.25 / (0.0928 - 0.06) = $28.90

Question 14

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?

Accepted Answer

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

Question 15

You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF1) is expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

Accepted Answer

Step 1: Calculate the enterprise value (EV)

EV = FCF1 / (WACC - g)
   = $27.50 million / (0.10 - 0.07)
   = $916.67 million

Step 2: Calculate the equity value

Equity value = EV - Debt - Preferred stock
                  = $916.67 million - $125.0 million
                  = $791.67 million

Step 3: Calculate intrinsic value per share

Intrinsic value per share = Equity value / Number of shares outstanding
                                         = $791.67 million / 15.0 million
                                         = $52.78

Therefore, the estimated intrinsic value per share of common stock is $52.78. Option C is the correct answer.

Question 16

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?

Accepted Answer

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

Question 17

Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's total corporate value, in millions?

Accepted Answer

The correct answer is B. The total corporate value is the sum of the present value of the negative free cash flow in Year 1 and the present value of the positive free cash flows in Years 2 and beyond. The present value of the negative free cash flow in Year 1 is -$10 million / (1 + 0.14)^1 = -$8.77 million. The present value of the positive free cash flows in Years 2 and beyond is $25 million / (0.14 - 0.04) = $210.53 million. Therefore, the total corporate value is -$8.77 million + $210.53 million = $201.76 million.

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?

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

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?

Accepted Answer

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

Question 20

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?

Accepted Answer

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

Quiz 9: Stocks