Exam 4: The Value of Common Stocks

Parcel Corporation expects to pay a dividend of $5 per share next year, and the dividend payout ratio is 50 percent. If dividends are expected to grow at a constant rate of 8 percent forever, and the required rate of return on the stock is 13 percent, calculate the present value of growth opportunities.

Casino Inc. expects to pay a dividend of $3 per share at the end of year 1 (Div₁)and these dividends are expected to grow at a constant rate of 6 percent per year forever. If the required rate of return on the stock is 18 percent, what is the current value of the stock today?

The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

Analysts often value companies by forecasting a series of cash flows and then estimating a horizon value. Suppose a firm forecasts a project's net cash flows ($millions)in years 1 through 4 as $120, $130, $135, and $137, respectively. If the project ends at the end of the fourth year, what is the horizon value of the project? Assume that the company had a historical growth rate of 3 percent and has a discount rate of 10 percent.

Galaxy Air, previously a no-growth firm, has two million shares outstanding. Until now, it consistently earned $20 million per year on its assets. (It has no debt and pays out all earnings as dividends. Its cost of capital is 10 percent.)Due to its newly appointed CEO, Galaxy Air is now able to squeeze out 1 percent annual growth by plowing back 5 percent of earnings. Calculate its stock price per share.

Briefly explain the assumptions associated with the constant dividend growth formula.

Which of the following formulas regarding the earnings-to-price ratio is true?

A high proportion of the value of a growth stock typically comes from

World-Tour Co. has just now paid a dividend of $2.83 per share (Div₀); its dividends are expected to grow at a constant rate of 6 percent per year forever. If the required rate of return on the stock is 16 percent, what is the current value of the stock, after paying the dividend?

An investor who uses a market order instructs her brokerage firm to buy a given quantity of shares at the best available price.

The valuation of a common stock today primarily depends on

The New York Stock Exchange is the only stock market in the United States.

Will Co. is expected to pay a dividend of $2 per share at the end of year 1(Div₁), and the dividends are expected to grow at a constant rate of 4 percent forever. If the current price of the stock is $20 per share, calculate the expected return or the cost of equity capital for the firm.

Discuss the term price-earnings (P/E)ratio.

The cost of equity capital equals the dividend yield minus the growth rate in dividends for a constant dividend growth stock.

CK Company stockholders expect to receive a year-end dividend of $5 per share and then immediately sell their shares for $115 dollars per share. If the required rate of return for the stock is 20 percent, what is the current value of the stock?

The only payoff to the owners of common stocks is in the form of cash dividends.

Ottocell Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 10 percent next year, 8 percent for the following two years, and then a constant rate of 5 percent thereafter. What is the expected dividend per share at the end of year 5?

Briefly explain the term market capitalization rate.

The following are foreign companies that are traded on the New York Stock Exchange: