Exam 5: Basic Stock Valuation

Cartwright Brothers' stock is currently selling for $40 a share. The stock is expected to pay a $2 dividend at the end of the year. The stock's dividend is expected to grow at a constant rate of 7 percent a year forever. The risk-free rate (rRF) is 6 percent and the market risk premium (rM - rRF) is also 6 percent. What is the stock's beta?

DAA's stock is selling for $15 per share. The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared as yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6 percent. The firm's required rate of return is 18 percent. The stock is

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Assume an all equity firm has been growing at a 15 percent annual rate and is expected to continue to do so for 3 more years. At that time, growth is expected to slow to a constant 4 percent rate. The firm maintains a 30 percent payout ratio, and this year's retained earnings net of dividends were $1.4 million. The firm's beta is 1.25, the risk-free rate is 8 percent, and the market risk premium is 4 percent. If the market is in equilibrium, what is the market value of the firm's common equity (1 million shares outstand¬ing)?

A stock is expected to pay no dividends for the first three years, i.e., D1 = $0, D2 = $0, and D3 = $0. The dividend for Year 4 is expected to be $5.00 , and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the stock's beta is 1.5. Assuming the stock is fairly priced, what is the current price of the stock?

Which of the following statements is most correct?

Grant Corporation's stock is selling for $40 in the market. The company's beta is 0.8, the market risk premium is 6 percent, and the risk-free rate is 9 percent. The previous dividend was $2 and dividends are expected to grow at a constant rate. What is the growth rate for this stock?

McNally Motors has yet to pay a dividend on its common stock. However, the company expects to pay a $1.00 dividend starting two years from now . Thereafter, the stock's dividend is expected to grow at a constant rate of 5 percent a year. The stock's beta is 1.4, the risk-free rate is rRF = 0.06, and the expected market return is rM = 0.12. What is the stock's expected price four years from now, i.e., what is ?

McPherson Enterprises is planning to pay a dividend of $2.25 per share at the end of the year . After that time the dividends will grow at a constant rate of 5 percent per year. If the required return on the company's common stock is 11 percent per year, what is the current stock price?

After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.

ABC Company has been growing at a 10 percent rate, and it just paid a dividend of D0 = $3.00. Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth rate, to 20 percent annually for the next 2 years. After this time, growth is expected to return to the long-run constant rate of 10 percent. The company's beta is 2.0, the required return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should the dividend yield (D1/P0) be today?

A stock expects to pay a year-end dividend of $2.00 a share (i.e., D1 = $2.00; assume that last year's dividend has already been paid). The dividend is expected to fall 5 percent a year, forever (i.e., g = -5%). The company's expected and required rate of return is 15 percent. Which of the following statements is most correct?

The Stuart Corporation has excess cash to invest in one of two securities. The company's tax rate is 40 percent. The first alternative is a 10-year, 10 percent coupon bond (with semiannual interest payments) that has a current price of $1,000 and a yield of 10 percent. The second alternative is the preferred stock of Pickett Corp. which promises to pay a before-tax return of 9 percent. What is the after-tax nominal return of the better investment alternative?

Thames Inc.'s most recent dividend was $2.40 per share . The dividend is expected to grow at a rate of 6 percent per year. The risk-free rate is 5 percent and the return on the market is 9 percent. If the company's beta is 1.3, what is the price of the stock today?

Berg Inc. has just paid a dividend of $2.00. Its stock is now selling for $48 per share. The firm is half as risky as the market. The expected return on the market is 14 percent, and the yield on U.S. Treasury bonds is 11 percent. If the market is in equilibrium, what rate of growth is expected?

Which of the following statements is false?

A stock currently sells for $28 a share. Its dividend is growing at a constant rate, and its dividend yield is 5 percent. The required rate of return on the company's stock is expected to remain constant at 13 percent. What is the expected stock price, seven years from now?

The preemptive right is important to shareholders because it

The constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity.

Which of the following statements is most correct?