Exam 7: Valuing Stocks

The Busby Corporation had a share price at the start of the year of $26.20,paid a dividend of $0.56 at the end of the year,and had a share price of $29.00 at the end of the year.Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?

Parminder Partners is expected to generate free cash flows of $4 million per year for the next 5 years,after which they are expected to grow at a rate of 3% per year.The firm currently has $2 million of cash,$7 million of debt,and a cost of capital of 8%.If the firm has 10 million shares outstanding,what is Parminder's expected current share price?

Sinclair ᴾʰᵃʳᵐᵃᶜᵉᵘᵗᶦᶜᵃˡˢ,a small drug company,develops a vaccine that will protect against Helicobacter pylori,a bacteria that is the cause of a number of diseases of the stomach.It is expected that Sinclair ᴾʰᵃʳᵐᵃᶜᵉᵘᵗᶦᶜᵃˡˢ will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time.Earnings were $1.20 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years.After this time,it is expected growth will drop to 5% and stay there for the expected future.Four years from now Sinclair will pay dividends that are 75% of its earnings.If its equity cost of capital is 10%,what is the value of a share of Sinclair ᴾʰᵃʳᵐᵃᶜᵉᵘᵗᶦᶜᵃˡˢ ᵗᵒᵈᵃʸ?

If you value a stock using a range of stock valuation methods and these valuations indicate a stock price that is greater than its actual market price,it is most likely that the stock is under-valued.

Jumbo Transport,an air-cargo company,expects to have earnings per share of $2.50 in the coming year.It decides to retain 20% of these earnings in order to lease new aircraft.The return on this investment will be 25%.If its equity cost of capital is 12%,what is the expected share price of Jumbo Tranport?

Shield Security pays annual dividends and has just paid this year's dividend of $1.20.If its equity cost of capital is 10%,and dividends are expected to grow by 5% per year in the future,what is the value of Shield's stock?

Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year.It is expected that the price of Valorous' stock will be $44 per share after two years.If Valorous has an equity cost of capital of 8%,what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Which of the following is the best statement of the efficient markets hypothesis?

Aerelon Airways,a commercial airline,suffers a major crash.As a result,passengers are considered to be less likely to choose Aerelon as their carrier,and it is expected free cash flows will fall by $20 million per year for five years.If Aerelon has 65 million shares outstanding,an equity cost of capital of 12%,and no debt,by how much would Aerelon's shares be expected to fall in price as a result of this accident?

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time,immediately after it pays a dividend of $0.26.Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Suppose Air Canada has a current share price of $10.50 and an EPS of 1.12.Its competitor,WestJet,has an EPS of 3.13.Using the method of comparables,what is the expected price of WestJet stock?

Use the figure for the question(s) below. -On a particular date,the above information concerning Office Depot,Incorporated,was given on Google Finance.Its competitor,Staples Incorporated,had a stock price of $24.72.Which of the following is closest to the EPS of Staples Incorporated if it is estimated using valuation multiples based on price-earnings ratios?

NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Which of the following models can be used to value a firm without explicitly forecasting that firm's dividends,share repurchases,or its use of debt? I. Dividend-discount model II)Total payout model III) Discounted free cash flow model

What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?

Cork Bottlers has 84 million shares outstanding and expects earnings at the end of this year of $54 million.Cork plans to pay out 30% of its earnings as a dividend and 10% of its earnings through share repurchases.The firm has an equity cost of capital of 12%.If Tarmac' earnings are expected to grow by 6.5% per year and these payout rates remain constant,what is Tarmac's share price?

With more firms introducing stock repurchase plans,how can we value such firms?

Harbour Corporation pays a dividend of $2.15 per year,which is expected to grow at a rate of 3% per year.Harbour has a cost of capital of 12%,and an EPS of $4.42.Its competitor,Pallantine Inc.,pays a yearly dividend of $1.25 per year,which is expected to grow at a rate of 6% per year.Pallantine has an EPS of $5.19.Solve for Pallantine's cost of capital using the method of comparables.

Use the figure for the question(s) below. -The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA)after the close of business on May 30,2008.What is the difference between the opening and closing price of the stock on this date?

Use the figure for the question(s) below. -The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc.after the close of the stock market on May 30,2008.What is the highest that the stock has traded at in the last 12 months?