Exam 5: Basic Stock Valuation

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent rate of return, what is the price of the stock?

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is "closely held."

A financial analyst has been following Fast Start Inc., a new high-growth company. She estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5 percent, and that Fast Start's beta is 1.75. The current earnings per share (EPS0) is $2.50. The company has a 40 percent payout ratio. The analyst estimates that the company's dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent the following year. After three years the dividend is expected to grow at a constant rate of 7 percent a year. The company is expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. What is the current price of the stock?

Hard Hat Construction's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, E0, were $4.00, and the dividend payout ratio is 40 percent. The risk-free rate is 8 percent, and the market risk premium is 5 percent. If market risk (beta) increases by 50 percent, and all other factors remain constant, by how much will the stock price change? (Hint: Use four decimal places in your calculations.)

The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

Which of the following statements is most correct?

Conner Corporation has a stock price of $32.35 per share. The last dividend was $3.42 . The long-run growth rate for the company is a constant 7 percent. What is the company's capital gains yield and dividend yield?

Which of the following statements is most correct?

A share of stock has a dividend of D0 = $5. The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal growth rate of 10 percent forever. If investors require a 10 percent return on this stock, what is its current price?

A company's free cash flow per was just $3.00 million. If the expected long-run growth rate for this company is 5 percent, and if the WACC is 11 percent then what is the value of the entire firm's operations, in millions?

Assume that markets are semistrong-form efficient. Which of the following statements is most correct?

A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.