Question 1

The valuation of a common stock today primarily depends on:

Accepted Answer

A) the number of shares outstanding and the number of its shareholders. 
B) its expected future dividends and its discount rate. 
C) Wall Street analysts. 
A) the number of shares outstanding and the number of its shareholders. 
B) its expected future dividends and its discount rate. 
C) Wall Street analysts.

Question 2

Super Computer Company's stock is selling for $100 per share today.It is expected that-at the end of one year-it will pay a dividend of $6 per share and then be sold for $114 per share.Calculate the expected rate of return for the shareholders.

Accepted Answer

A) 20% 
B) 15% 
C) 10% 
D) 25% 
A) 20% 
B) 15% 
C) 10% 
D) 25%

Question 3

Will Co.is expected to pay a dividend of $2 per share at the end of year 1(D1),and the dividends are expected to grow at a constant rate of 4% forever.If the current price of the stock is $20 per share,calculate the expected return or the cost of equity capital for the firm.

Accepted Answer

A) 10% 
B) 4% 
C) 14% 
D) 20% 
A) 10% 
B) 4% 
C) 14% 
D) 20%

Question 4

The only payoff to the owners of common stocks is in the form of cash dividends.

Accepted Answer

A) True 
 B)False

Question 5

Briefly explain the term market capitalization rate.

Accepted Answer

The rate of return expected by the inves

Question 6

If a Wall Street Journal quotation for a company has the following values: close,55.14; net change: = +1.04; then the closing price for the stock for the previous trading day was?

Accepted Answer

A) $56.18 
B) $54.10 
C) $55.66 
D) $53.02 
A) $56.18 
B) $54.10 
C) $55.66 
D) $53.02

Question 7

Assume General Electric (GE)has about 10.3 billion shares outstanding and the stock price is $37.10.Also,assume the P/E ratio is about 18.3.Calculate the approximate market capitalization for GE.

Accepted Answer

A) $679 billion 
B) $188 billion 
C) $382 billion 
D) $103 billion 
A) $679 billion 
B) $188 billion 
C) $382 billion 
D) $103 billion

Question 8

One can use the discounted cash-flow formulas that are used to value common stocks in order to value entire businesses.

Accepted Answer

A) True 
 B)False

Question 9

A company forecasts growth of 6% for the next five years and 3% thereafter.Given last year's free cash flow was $100,what is its horizon value if the company cost of capital is 8%?

Accepted Answer

A) $0 
B) $1,672 
C) $2,000 
D) $2,676 
A) $0 
B) $1,672 
C) $2,000 
D) $2,676

Question 10

Ocean Co.just paid a dividend of $2 per share out of earnings of $4 per share.If the book value per share is $25,what is the expected growth rate in dividends (g)?

Accepted Answer

A) 16% 
B) 12% 
C) 8% 
A) 16% 
B) 12% 
C) 8%

Question 11

Ottocell Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 10% next year,8% for the following two years,and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

Accepted Answer

A) $2.08 
B) $1.98 
C) $1.80 
D) $0.99 
A) $2.08 
B) $1.98 
C) $1.80 
D) $0.99

Question 12

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1,$3 per share at the end of year 2,and then be sold for $32 per share at the end of year 2.If the required rate of return on the stock is 15%,what is the current value of the stock?

Accepted Answer

A) $28.20 
B) $32.17 
C) $32.00 
D) $29.18 
A) $28.20 
B) $32.17 
C) $32.00 
D) $29.18

Question 13

World-Tour Co.has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever.If the required rate of return on the stock is 16%,what is the current value of the stock,after paying the dividend?

Accepted Answer

A) $70 
B) $56 
C) $30 
D) $48 
A) $70 
B) $56 
C) $30 
D) $48

Question 14

River Co.just paid a dividend of $2 per share out of earnings of $4 per share.If its book value per share is $25 and its stock is currently selling for $40 per share,calculate the required rate of return on the stock.

Accepted Answer

A) 15.2% 
B) 7.2% 
C) 14.7% 
D) 13.4% 
A) 15.2% 
B) 7.2% 
C) 14.7% 
D) 13.4%

Question 15

Briefly explain the assumptions associated with the constant dividend growth formula.

Accepted Answer

There are two important assumptions that

Question 16

The New York Stock Exchange is the only stock market in the U.S.

Accepted Answer

A) True 
 B)False

Question 17

Michigan Co.just paid a dividend of $2.00 per share.Analysts expect future dividends to grow at 20% per year for the next four years and then grow at 6% per year thereafter.Calculate the expected dividend in year 5.

Accepted Answer

A) $4.15 
B) $2.95 
C) $4.40 
D) $3.81 
A) $4.15 
B) $2.95 
C) $4.40 
D) $3.81

Question 18

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%,calculate the current price per share of the stock.

Accepted Answer

A) $200 
B) $150 
C) $100 
D) $50 
A) $200 
B) $150 
C) $100 
D) $50

Question 19

Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever,regular dividend along with huge profits.

Accepted Answer

Under the concept of PVGO,Microsoft was

Question 20

Discuss the general principle at work in valuing a common stock.

Accepted Answer

The value of a common stock is the expec

Exam 4: The Value of Common Stocks

The valuation of a common stock today primarily depends on:

Super Computer Company's stock is selling for $100 per share today.It is expected that-at the end of one year-it will pay a dividend of $6 per share and then be sold for $114 per share.Calculate the expected rate of return for the shareholders.

Will Co.is expected to pay a dividend of $2 per share at the end of year 1(D1),and the dividends are expected to grow at a constant rate of 4% forever.If the current price of the stock is $20 per share,calculate the expected return or the cost of equity capital for the firm.

The only payoff to the owners of common stocks is in the form of cash dividends.

Briefly explain the term market capitalization rate.

If a Wall Street Journal quotation for a company has the following values: close,55.14; net change: = +1.04; then the closing price for the stock for the previous trading day was?

Assume General Electric (GE)has about 10.3 billion shares outstanding and the stock price is $37.10.Also,assume the P/E ratio is about 18.3.Calculate the approximate market capitalization for GE.

One can use the discounted cash-flow formulas that are used to value common stocks in order to value entire businesses.

A company forecasts growth of 6% for the next five years and 3% thereafter.Given last year's free cash flow was $100,what is its horizon value if the company cost of capital is 8%?

Ocean Co.just paid a dividend of $2 per share out of earnings of $4 per share.If the book value per share is $25,what is the expected growth rate in dividends (g)?

Ottocell Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 10% next year,8% for the following two years,and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1,$3 per share at the end of year 2,and then be sold for $32 per share at the end of year 2.If the required rate of return on the stock is 15%,what is the current value of the stock?

World-Tour Co.has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever.If the required rate of return on the stock is 16%,what is the current value of the stock,after paying the dividend?

River Co.just paid a dividend of $2 per share out of earnings of $4 per share.If its book value per share is $25 and its stock is currently selling for $40 per share,calculate the required rate of return on the stock.

Briefly explain the assumptions associated with the constant dividend growth formula.

The New York Stock Exchange is the only stock market in the U.S.

Michigan Co.just paid a dividend of $2.00 per share.Analysts expect future dividends to grow at 20% per year for the next four years and then grow at 6% per year thereafter.Calculate the expected dividend in year 5.

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%,calculate the current price per share of the stock.

Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever,regular dividend along with huge profits.

Discuss the general principle at work in valuing a common stock.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

Will Co.is expected to pay a dividend of $2 per share at the end of year 1(D₁),and the dividends are expected to grow at a constant rate of 4% forever.If the current price of the stock is $20 per share,calculate the expected return or the cost of equity capital for the firm.

World-Tour Co.has just now paid a dividend of $2.83 per share (D₀); its dividends are expected to grow at a constant rate of 6% per year forever.If the required rate of return on the stock is 16%,what is the current value of the stock,after paying the dividend?