Exam 4: The Value of Common Stocks

All securities in an equivalent risk class are priced to offer the same expected return.

Universal Air is a no-growth firm and has two million shares outstanding. It expects to earn a constant $20 million per year on its assets. If it has no debt, all earnings are paid out as dividends, and the cost of capital is 10 percent, calculate the current price per share of the stock.

A Wall Street Journal quotation for a company has the following values: Div: $1.12, PE: 18.3, Close: $37.22. Calculate the approximate dividend payout ratio for the company.

R&D Technology Corporation just paid a dividend of $0.50 per share. Analysts expect its dividend to grow at 24 percent per year for the next two years and then 8 percent per year thereafter. If the required rate of return in the stock is 16 percent, calculate the current value of the stock.

A large percentage of the total value of a growth stock comes from the present value of its growth opportunities.