Question 1

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's equity cost of capital is closest to:

Accepted Answer

D)Equity cost of capital = 1.20/30.00 + (33 - 30)/30 = .04 + .10 = .14

Question 2

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's expected dividend yield is closest to:

Accepted Answer

C)Div yield = 1.20/30 = .04 or 4%

Question 3

Which of the following statements is false regarding profitable and unprofitable growth?

Accepted Answer

A)This will only increase the share price if the reinvested money is invested in positive NPV projects.

Question 4

Which of the following statements is FALSE?

Accepted Answer

Total return equals earnings multiplied by the dividend payout rate is a false statement. Total return is calculated by adding capital gains or losses to dividend yield, not by multiplying earnings with dividend payout rate.

Question 5

Which of the following statements is FALSE?

Accepted Answer

D)During periods of high growth,it is not unusual for these firms to retain 100% of their earnings to exploit profitable investment opportunities.

Question 6

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

Accepted Answer

A)Two steps. Step #1 solve for r_E, r_E = Div₁/P₀ + g = 2.50/25.00 + .04 = .14 or 14% Step #2 solve for new stock price: P₀ = Div₁/(r_E - g)= 1.50/(.14 - .08)= 25.00

Question 7

Which of the following formulas is INCORRECT?

Accepted Answer

B)P_N = 11ea7cce_3b9c_55f7_928c_2ba8c422fa9a_TB1626_00

Question 8

You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

Accepted Answer

B)g = retention rate × return on new investment
= (3.00 - 1.50)/3.00 × .15 = .075 or 7.5%

Question 9

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's expected capital gains yield is closest to:

Accepted Answer

D)Div yield = (33 - 30)/30 = .10 or 10%

Question 10

You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The value of a share of KTI's stock is closest to:

Accepted Answer

C)g = retention rate × return on new investment = (3.00 - 1.50)/3.00 × .15 = .075 or 7.5% P₀ = Div₁/(r_E - g)= 1.50/(.12 - .075)= 33.33

Question 11

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.Luther Industries dividends are expected to grow at a constant rate indefinitely.The grow rate of Luther's dividends are closest to:

Accepted Answer

A)r_E = Div_1/P₀ + g .12 = .045 + g so g = .075

Question 12

You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:

Accepted Answer

C) 11ea7cce_3b9d_6768_928c_7bcd61122abb_TB1626_00 P₀ = 1.73/(1.12)⁴ + 1.90/1.12⁵ + (3.14/(.12 - .05))/1.12⁵ = 27.63 Each g is calculated as the 20% return on the projects × the retention ratio.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A)A multistage model should be used.

Question 14

Which of the following statements is FALSE?

Accepted Answer

D)According to the constant dividend growth model,the value of the firm depends on the current dividend level,divided by the equity cost of capital adjusted by the growth rate.

Question 15

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

D)P₀ = Div_1/(r_E - g)= $1.50/(.12 - 0)= $12.50

Question 16

The Sisyphean Company's common stock is currently trading for $25.00 per share.The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%.If the dividend payout rate is expected to remain constant,then the expected growth rate in the Sisyphean Company's earnings is closest to:

Accepted Answer

C)P₀ = Div₁/(r_E- g)= 25.00 = 2.50/(.14 - g)so g = .04

Question 17

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:

Accepted Answer

A)P₀ = Div₁/(r_E - g)= 2.00/(.13 - .05)= $25.00

Question 18

Which of the following is NOT a way that a firm can increase its dividend?

Accepted Answer

Increasing the retention rate means the company is retaining more earnings rather than distributing them as dividends, which would not increase the dividend.

Question 19

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Accepted Answer

B)Dividend Yield = $0.75/$25 = .03 or 3%
Equity cost of capital = 0.75/25.00 + (26.75 - 25.00)/25.00 = .03 + .07 = .10 or 10%

Question 20

Which of the following formulas is INCORRECT?

Accepted Answer

D)r_E = 11ea7cce_3b9b_e1bf_928c_83723b148646_TB1626_00 + g

Quiz 9: Valuing Stocks

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's equity cost of capital is closest to:

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's expected dividend yield is closest to:

Which of the following statements is false regarding profitable and unprofitable growth?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's expected capital gains yield is closest to:

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.Luther Industries dividends are expected to grow at a constant rate indefinitely.The grow rate of Luther's dividends are closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:

Which of the following is NOT a way that a firm can increase its dividend?

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Which of the following formulas is INCORRECT?