Question 1

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

Accepted Answer

A) P₀ = 1.25 / 0.075 = $16.67

Question 2

A stock is expected to pay $3.20 per share every year indefinitely and the equity cost of capital for the company is 10%.What price would an investor be expected to pay per share next year?

Accepted Answer

D) P₀ = 3.20 / 0.10 = $32.00

Question 3

Bondi Company is expected to pay a quarterly dividend of $0.45 for the next five years.If the current price of Bondi stock is $17.62,and Bondi's equity cost of capital is 12% per year,what price would you expect Bondi's stock to sell for at the end of the five years?

Accepted Answer

D) I = (1.12)¹/⁴ - 1 = 2.8737%
Using a financial calculator, PV = -17.62, PMT = 0.45, n = 20, I = 2.8737;
Calculate FV = 19.11

Question 4

A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.

Accepted Answer

This statement is true. A firm can choose to pay dividends to its investors from its earnings or it can choose to retain the earnings and use them to fund internal growth opportunities or other investments.

Question 5

The Busby Corporation had a share price at the start of the year of $26.20,paid a dividend of $0.56 at the end of the year,and had a share price of $29.00 at the end of the year.Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?

Accepted Answer

D) 29.56 - 26.20 = 3.36; 3.36 / 26.2 = 12.82%; rounded up to 13%

Question 6

Canberra Corp expects to have earnings per share of $8.40 in the coming year.Canberra has a return on new investment of 14%.If the firm's dividend payout rate is 75%,and its equity cost of capital is 9%,what is the value of Canberra's stock?

Accepted Answer

A) Div = EPS × Dividend Payout Rate = 8.40 × 0.75 = $6.30
g = Retention rate × return on new investment = 0.25 × 0.14 = 3.5%
P = Div/(r - g) = 6.30/(0.09 - 0.035) = $114.55

Question 7

Cook Pharmaceuticals plans to pay $1.55 per share in dividends in the coming year.If its equity cost of capital is 8%,and dividends are expected to grow by 3% per year in the future,what is the value of Cook's stock?

Accepted Answer

A) P₀ = Div₁ / (rE - g) = $1.55 / (0.08 - 0.03) = $31.00

Question 8

Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount indefinitely.If Matilda's equity cost of capital is 12%,which of the following would be expected to be closest to Matilda's stock price?

Accepted Answer

C) PV0 = 2.25 / 0.12 = $18.75

Question 9

Credenza Industries is expected to pay a dividend of $1.20 at the end of the coming year.It is expected to sell for $62.00 at the end of the year.If its equity cost of capital is 8%,what is the expected capital gain from the sale of this stock at the end of the coming year?

Accepted Answer

A) (1.2 + 62) / 1.08 = 58.5185; 62 - 58.5185 = $3.48

Question 10

Bentham Books pays annual dividends and has just paid this year's dividend of $0.65.If its equity cost of capital is 12%,and dividends are expected to grow by 3% per year in the future,what is the value of Bentham's stock?

Accepted Answer

C) Use next year's dividend: 0.65 × 1.03 = 0.67
P₀ = Div₁ / (rE - g) = $0.67/ (0.12 - .03) = $7.44

Question 11

Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year.It is expected that the price of Valorous' stock will be $44 per share after two years.If Valorous has an equity cost of capital of 8%,what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Accepted Answer

C) Using a financial calculator, CF0 = 0, CF1 = 1.8, CF2 = (44 + 2.4) = 46.4;
calculate NPV at I = 8%, equals $41.45.

Question 12

Shield Security pays annual dividends and has just paid this year's dividend of $1.20.If its equity cost of capital is 10%,and dividends are expected to grow by 5% per year in the future,what is the value of Shield's stock?

Accepted Answer

B) Use next year's dividend: 1.20 × 1.05 = 1.26
P₀ = Div₁ / (rE - g) = $1.26/ (0.10 - .05) = $25.20

Question 13

Herring Fisheries plans to pay $0.65 per share in dividends in the coming year.If its equity cost of capital is 11%,and dividends are expected to grow by 2.5% per year in the future,what is the value of Herring's stock?

Accepted Answer

D) P₀ = Div₁ / (rE - g) = $0.65/ (0.11 - .025) = $7.65

Question 14

Wellington Corporation is expected to pay a monthly dividend of $0.12 for the next three years.If the current price of Wellington stock is $41.35,and Wellington's equity cost of capital is 15% per year,what price would you expect Wellington's stock to sell for at the end of the three years?

Accepted Answer

E) I = (1.15)¹/¹² - 1 = 1.1715%
Using a financial calculator, PV = -41.35, PMT = 0.12, n = 36, I = 1.1715;
Calculate FV = 57.55

Question 15

Garville Corporation has a current stock price of $7.43 and is expected to sell for $8.14 in one year's time,immediately after it pays a dividend of $0.35.Which of the following is closest to Garville's equity cost of capital?

Accepted Answer

E) 0.35 + 8.14 = 8.49; cost of capital = 8.49/7.43 - 1 = 14.3%

Question 16

A stock is expected to pay $0.80 per share every year indefinitely.If the current price of the stock is $18.90,and the equity cost of capital for the company that released the shares is 6.4%,what price would an investor be expected to pay per share five years into the future?

Accepted Answer

A) P0 = 0.8 / 0.064 = $12.50

Question 17

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time,immediately after it pays a dividend of $0.26.Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Accepted Answer

C) 0.26 + 2.10 = 2.36; cost of capital = 0.36 / 2 = 18%

Question 18

A stock is bought for $22.00 and sold for $26.00 one year later,immediately after it has paid a dividend of $1.50.What is the capital gain rate for this transaction?

Accepted Answer

D) (26 - 22) / 22 = 18.18%

Question 19

Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years.If the current price of Coolibah stock is $22.40,and Coolibah's equity cost of capital is 16%,what price would you expect Coolibah's stock to sell for at the end of three years?

Accepted Answer

A) Using a financial calculator, PV = -22.4, PMT = 1.2, n = 6, I = 8;
calculate FV = 26.74.

Question 20

Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

Accepted Answer

A) Using a financial calculator, PV = -32.63, PMT = 5.2, n = 4, I = 14;
Calculate FV = 29.52

Quiz 7: Valuing Stocks