Exam 11: Introduction to Security Valuation

Exhibit 11.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever. -Refer to Exhibit 11.8. If the required return is 14%, what is the value of Fast Grow Corporation common stock today?

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -A preferred stock is a perpetuity.

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -The required rate of return is determined by (1) the real risk free rate, (2) the expected rate of inflation and (3) liquidity risk.

Hunter Corporation had a dividend payout ratio of 63% in 1999. The retention rate in 1999 was

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -Given an optimistic economic and stock-market outlook for a country, the investor should underweight the allocation to this country in his/her portfolio.

Which of the following statements regarding fundamental and relative valuation techniques is true?

Exhibit 11.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 11.6. The future price of the stock in year 5 is

Exhibit 11.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever. -Refer to Exhibit 11.8. Assume that the annual dividend grows at a constant rate of 9% indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9%?

Exhibit 11.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 6 years remaining until maturity. The bonds were issued with a 6 percent coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10 percent. -Refer to Exhibit 11.3. What is the current value of these securities?

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.

Ross Corporation paid dividends per share of $1.20 at the end of 1990. At the end of 2000 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.

Which of the following is not considered a basic economic force?

What is the value of a preferred stock that has a par value of $100, a required rate of return of 11%, and pays a 7 percent annual dividend?

Dividend growth is a function of

The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate of zero in the DDM model.

Using the constant growth model, a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -The value of preferred stock can be calculated by dividing its dividend by the required rate of return.

The P/E ratio is determined by

Exhibit 11.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 11.7. The present value today of dividends for years 1 to 3 is

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -An example of a relative valuation technique is the Price/Cash Flow ratio.