Deck 5: Basic Stock Valuation

Question 1

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period.

Question 5

The cash flows associated with common stock are dif¬ficult to evaluate due to the uncertainty and varia¬bility associated with them.

Question 6

The preemptive right is important to shareholders because it

A) Allows management to sell additional shares below the current market price.
B) Protects the current shareholders against dilution of ownership interests.
C) Is included in every corporate charter.
D) Will result in higher dividends per share.
E) The preemptive right is not important to shareholders.

Question 7

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct?

A) All common stocks fall into one of three classes: A, B, and C.
B) Most firms have several classes of common stock outstanding.
C) All common stock, regardless of class, must have voting rights.
D) All common stock, regardless of class, must have the same dividend privileges.
E) None of the statements above is necessarily true.

Question 8

According to the textbook model, under conditions of nonconstant growth, the dis¬count rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

Question 9

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.

Question 10

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.

Question 11

Classified stock is one tool companies can use to meet special needs such as when owners of a start-up firm need capital but don't want to relinquish control of the firm.

Question 12

If a firm's stockholders are given the preemptive right, this means that a group of stockholders can call for a meeting to replace the management. With¬out the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight.

Question 13

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

Question 14

A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates what investments the firm makes.

Question 15

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."

Question 16

Which of the following statements is most correct?

A) If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but the two classes must have the same voting rights.
B) An IPO occurs whenever a company buys back its stock on the open market.
C) The preemptive right is a provision in the corporate charter which gives common stockholders the right to purchase (on a pro rata basis) new issues of common stock.
D) Statements a and b are correct.
E) Statements a and c are correct.

Question 17

If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return.

Question 18

Which of the following statements is most correct?

A) One of the advantages of financing with stock is that a greater proportion of stock in the capital structure can reduce the risk of a takeover bid.
B) A firm with classified stock can pay different dividends to each class of shares.
C) One of the advantages of financing with stock is that a firm's debt ratio will decrease.
D) Both statements b and c are correct.
E) All of the statements above are correct.

Question 19

According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.

Question 20

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm.

Question 21

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

A) All stocks should have the same expected return.
B) All stocks should have the same realized return.
C) Past stock prices can be successfully used to forecast future stock returns.
D) Answers a and c are correct.
E) None of the answers above is correct.

Question 22

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?

A) The company's stock price is $10.
B) The company's expected dividend yield 5 years from now will be 20 percent.
C) The company's stock price 5 years from now is expected to be $7.74.
D) Both answers b and c are correct.
E) All of the above answers are correct.

Question 23

Which of the following statements is most correct?

A) If a stock's beta increased but its growth rate remained the same, then the new equilibrium price of the stock will be higher (assuming dividends continue to grow at the constant growth rate).
B) Market efficiency says that the actual realized returns on all stocks will be equal to the expected rates of return.
C) An implication of the semistrong form of the efficient markets hypothesis is that you cannot consistently benefit from trading on information reported in The Wall Street Journal.
D) Statements a and b are correct.
E) All of the statements above are correct.

Question 24

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

A) Increase.
B) Decrease.
C) Fluctuate.
D) Remain constant.
E) Possibly increase, possibly decrease, or possibly remain unchanged.

Question 25

Which of the following statements is most correct.

A) The stock valuation model, P0 = D1/(rs - g), can be used for firms which have negative growth rates.
B) If a stock has a required rate of return rs = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock's dividend yield is 5 percent.
C) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
D) Statements a and c are correct.
E) All of the statements above are correct.

Question 26

Which of the following statements is most correct?

A) Preferred stockholders have priority over common stockholders.
B) A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation.
C) Most preferred stock is owned by corporations.
D) Statements a and b are correct.
E) Statements a and c are correct.

Question 27

A stock's dividend is expected to grow at a constant rate of 5 percent a year. Which of the following statements is most correct?

A) The expected return on the stock is 5 percent a year.
B) The stock's dividend yield is 5 percent.
C) The stock's price one year from now is expected to be 5 percent higher.
D) Statements a and c are correct.
E) All of the statements above are correct.

Question 28

If the expected rate of return on a stock exceeds the required rate,

A) The stock is experiencing supernormal growth.
B) The stock should be sold.
C) The company is probably not trying to maximize price per share.
D) The stock is a good buy.
E) Dividends are not being declared.

Question 29

Assume that markets are semistrong efficient, but not strong-from efficient. Which of the following statements is most correct?

A) Each common stock has an expected return equal to that of the overall market.
B) Bonds and stocks have the same expected return.
C) Investors can expect to earn returns above those predicted by the SML if they have access to public information.
D) Investors may be able to earn returns above those predicted by the SML if they have access to information which has not been publicly revealed.
E) Answers b and c are correct.

Question 30

The expected rate of return on the common stock of Northwest Corporation is 14 percent. The stock's dividend is expected to grow at a constant rate of 8 percent a year. The stock currently sells for $50 a share. Which of the following statements is most correct?

A) The stock's dividend yield is 8 percent.
B) The stock's dividend yield is 7 percent.
C) The current dividend per share is $4.00.
D) The stock price is expected to be $54 a share in one year.
E) The stock price is expected to be $57 a share in one year.

Question 31

Which of the following statements is most correct?

A) If the stock market is weak-form efficient this means you cannot use private information to outperform the market.
B) If the stock market is semistrong-form efficient, this means the expected return on stocks and bonds should be the same.
C) If the stock market is semistrong-form efficient, this means that high beta stocks should have the same expected return as low beta stocks.
D) Statements b and c are correct.
E) None of the statements above is correct.

Question 32

Which of the following statements is most correct?

A) Assume that the required rate of return on a given stock is 13 percent. If the stock's dividend is growing at a constant rate of 5 percent, its expected dividend yield is 5 percent as well.
B) The dividend yield on a stock is equal to the expected return less the expected capital gain.
C) A stock's dividend yield can never exceed the expected growth rate.
D) All of the answers above are correct.
E) Answers b and c are correct.

Question 33

Which of the following statements is false?

A) When a corporation's shares are owned by a few individuals who are associated with or are the firm's management, we say that the stock is "closely held."
B) A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions as well as individuals.
C) Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.
D) When stock in a closely held corporation is offered to the public for the first time the transaction is called "going public" and the market for such stock is called the new issue market.
E) It is possible for a firm to go public, and yet not raise any additional new capital.

Question 34

Which of the following statements is most correct?

A) The constant growth model takes into consideration the capital gains earned on a stock.
B) It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.
C) Two firms with the same dividend and growth rate must also have the same stock price.
D) Statements a and c are correct.
E) All of the statements above are correct.

Question 35

Which of the following statements is most correct?

A) If a market is strong-form efficient this implies that the returns on bonds and stocks should be identical.
B) If a market is weak-form efficient this implies that all public information is rapidly incorporated into market prices.
C) If your uncle earns a return higher than the overall stock market, this means the stock market is inefficient.
D) Both answers a and b are correct.
E) None of the above answers is correct.

Question 36

Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak form and reasonably efficient in the semistrong form. Based on these findings which of the following statements are correct?

A) Information you read in The Wall Street Journal today cannot be used to select stocks that will consistently beat the market.
B) The stock price for a company has been increasing for the past 6 months. Based on this information it must be true that the stock price will also increase during the current month.
C) Information disclosed in companies' most recent annual reports can be used to consistently beat the market.
D) Statements a and c are correct.
E) All of the statements above are correct.

Question 37

Which of the following statements is most correct?

A) Semistrong-form market efficiency implies that all private and public information is rapidly incorporated into stock prices.
B) Market efficiency implies that all stocks should have the same expected return.
C) Weak-form market efficiency implies that recent trends in stock prices would be of no use in selecting stocks.
D) All of the answers above are correct.
E) None of the answers above is correct.

Question 38

Which of the following statements is most correct?

A) One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted.
B) Preferred stock provides steadier and more reliable income to investors than common stock.
C) One of the advantages to the firm of financing with preferred stock is that 70 percent of the dividends paid out are tax deductible.
D) Statements a and c are correct.
E) Statements a and b are correct.

Question 39

Which of the following statements is most correct?

A) Semistrong-form market efficiency means that stock prices reflect all public information.
B) An individual who has information about past stock prices should be able to profit from this information in a weak-form efficient market.
C) An individual who has inside information about a publicly traded company should be able to profit from this information in a strong-form efficient market.
D) Statements a and c are correct.
E) All the statements above are correct.

Question 40

If the stock market is semistrong efficient, which of the following statements is most correct?

A) All stocks should have the same expected returns; however, they may have different realized returns.
B) In equilibrium, stocks and bonds should have the same expected returns.
C) Investors can outperform the market if they have access to information which has not yet been publicly revealed.
D) If the stock market has been performing strongly over the past several months, stock prices are more likely to decline than increase over the next several months.
E) None of the statements above is correct.

Question 41

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?

A) $72.14
B) $57.14
C) $40.00
D) $68.06
E) $60.57

Question 42

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?

A) $50.00
B) $50.50
C) $52.50
D) $53.00

Question 43

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

A) $164.19
B) $ 75.29
C) $107.53
D) $118.35
E) $131.74

Question 44

The last dividend paid by a company was $2.20. Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a rate of return on equity (rs) of 11 percent. What is the current price of the stock?

A) $44.00
B) $46.64
C) $48.40
D) $48.64
E) $50.40

Question 45

Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock (rps) is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?

A) $125
B) $120
C) $175
D) $150
E) $200

Question 46

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?

A) $150
B) $100
C) $ 50
D) $ 25
E) $ 10

Question 47

Given the following information, calculate the expected capital gains yield for Chicago Bears Inc.: beta = 0.6; rM = 15%; rRF = 8%; D1 = $2.00; P0 = $25.00. Assume the stock is in equilibrium and exhibits constant growth.

A) 3.8%
B) 0%
C) 8.0%
D) 4.2%
E) 2.5%

Question 48

NOPREM Inc. is a firm whose shareholders don't possess the preemptive right. The firm currently has 1,000 shares of stock outstanding; the price is $100 per share. The firm plans to issue an additional 1,000 shares at $90.00 per share. Since the shares will be offered to the public at large, what is the amount per share that old shareholders will lose if they are excluded from purchasing new shares?

A) $90.00
B) $ 5.00
C) $10.00
D) $ 0
E) $ 2.50

Question 49

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?

A) $50.00
B) $50.50
C) $52.50
D) $53.00

Question 50

A share of preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is your nominal (not effective) annual rate of return?

A) 10%
B) 8%
C) 6%
D) 12%
E) 14%

Question 51

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?

A) 5.52%
B) 5.00%
C) 13.80%
D) 8.80%
E) 8.38%

Question 52

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?

A) 1.06
B) 1.00
C) 2.00
D) 0.83
E) 1.08

Question 53

Albright Motors is expected to pay a year-end dividend of $3.00 a share (D1 = $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?

A) 13.00%
B) 10.05%
C) 6.00%
D) 5.33%
E) 7.00%

Question 54

Carlson Products, a constant growth company, has a current market (and equilibrium) stock price of $20.00. Carlson's next dividend, D1, is forecasted to be $2.00, and Carlson is growing at an annual rate of 6 percent. Carlson has a beta coefficient of 1.2, and the required rate of return on the market is 15 percent. As Carlson's financial manager, you have access to insider information concerning a switch in product lines which would not change the growth rate, but would cut Carlson's beta coefficient in half. If you buy the stock at the current market price, what is your expected percentage capital gain?

A) 23%
B) 33%
C) 43%
D) 53%
E) There would be a capital loss.

Question 55

A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the nominal annual rate of return?

A) 12%
B) 18%
C) 20%
D) 23%
E) 28%

Question 56

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?

A) Capital gains yield = 7.00%; Dividend yield = 10.57%.
B) Capital gains yield = 10.57%; Dividend yield = 7.00%.
C) Capital gains yield = 7.00%; Dividend yield = 4.31%.
D) Capital gains yield = 11.31%; Dividend yield = 7.00%.
E) Capital gains yield = 7.00%; Dividend yield = 11.31%.

Question 57

A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share . Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company's stock is expected to remain constant. What is the current stock price?

A) $ 7.36
B) $ 8.62
C) $ 9.89
D) $10.98
E) $11.53

Question 58

The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (rs) is 12 percent. What is the current price of Klein's common stock?

A) $21.00
B) $33.33
C) $42.25
D) $50.16
E) $58.75

Question 59

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

A) $57.50
B) $62.25
C) $71.86
D) $64.00
E) $44.92

Question 60

Newburn Entertainment's stock is expected to pay a year-end dividend of $3.00 a share. (D1 = $3.00, the dividend at time 0, D0, has already been paid.) The stock's dividend is expected to grow at a constant rate of 5 percent a year. The risk-free rate, rRF, is 6 percent and the market risk premium, (rM - rRF), is 5 percent. The stock has a beta of 0.8. What is the stock's expected price five years from now?

A) $60.00
B) $76.58
C) $96.63
D) $72.11
E) $68.96

Question 61

Ceejay Corporation'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, what will be the new stock price? (Use 4 decimal places in your calculations.)

A) $16.59
B) $18.25
C) $21.39
D) $22.69
E) $53.48

Question 62

Kirkland Motors expects to pay a $2.00 a share dividend on its common stock at the end of the year . The dividend is expected to grow at some constant rate over time. What is the expected stock price five years from now, that is, what is ?

A) $21.65
B) $22.08
C) $25.64
D) $35.25
E) $36.78

Question 63

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) $100.00
B) $ 82.35
C) $195.50
D) $212.62
E) The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.

Question 64

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?

A) $24.62
B) $29.99
C) $39.40
D) $41.83
E) $47.98

Question 65

The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that rs = 11 percent and D0 = $2.00. What will be the price of the company's stock three years from now?

A) $27.17
B) $ 6.23
C) $28.50
D) $10.18
E) $20.63

Question 66

Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year (D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year . The stock's beta is 1.2, the risk-free rate of interest is 6 percent, and the rate of return on the market is 11 percent. What is the company's current stock price?

A) $29.89
B) $30.64
C) $37.29
D) $53.69
E) $59.05

Question 67

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?

A) 7.92%
B) 9.00%
C) 7.33%
D) 5.40%
E) 7.00%

Question 68

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 ?

A) $10.63
B) $12.32
C) $11.87
D) $13.58
E) $11.21

Question 69

Mack Industries just paid a dividend of $1.00 per share , and 15 percent next year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the current price of the company's stock?

A) $12.33
B) $16.65
C) $16.91
D) $18.67
E) $19.67

Question 70

Graham Enterprises anticipates that its dividend at the end of the year will be $2.00 a share . The dividend is expected to grow at a constant rate of 7 percent a year. The risk-free rate is 6 percent, the market risk premium is 5 percent, and the company's beta equals 1.2. What is the expected price of the stock five years from now?

A) $52.43
B) $56.10
C) $63.49
D) $70.49
E) $72.54

Question 71

R) E. Lee recently took his company public through an initial public offering. He is expanding the business quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 40 percent for the first three years and then he expects it to slow down to a constant 15 percent. The most recent dividend (D0) was $0.75. Based on the most recent returns, the beta for his company is approximately 1.5. The risk-free rate is 8 percent and the market risk premium is 6 percent. What is the current price of Lee's stock?

A) $77.14
B) $75.17
C) $67.51
D) $73.88
E) $93.20

Question 72

You are given the following data: (1) The risk-free rate is 5 percent.
(2) The required return on the market is 8 percent.
(3) The expected growth rate for the firm is 4 percent.
(4) The last dividend paid was $0.80 per share.
(5) Beta is 1.3.
Now assume the following changes occur:
(1) The inflation premium drops by 1 percent.
(2) An increased degree of risk aversion causes the required return on the market to go to 10 percent after adjusting for the changed inflation premium.
(3) The expected growth rate increases to 6 percent.
(4) Beta rises to 1.5.What will be the change in price per share, assuming the stock was in equilibrium before the changes?

A) +$12.11
B) -$ 4.87
C) +$ 6.28
D) -$16.97
E) +$ 2.78

Question 73

Rogers Robotics currently (2009) does not pay a dividend. However, the company is expected to pay a $1.00 dividend two years from today (2011). The dividend is then expected to grow at a rate of 20 percent a year for the following three years. After the dividend is paid in 2014, it is expected to grow forever at a constant rate of 7 percent. Currently, the risk-free rate is 6 percent, market risk premium (rM - rRF) is 5 percent, and the stock's beta is 1.4. What should be the price of the stock today?

A) $22.91
B) $21.20
C) $30.82
D) $28.80
E) $20.16

Question 74

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?

A) $52.50
B) $40.41
C) $37.50
D) $50.00
E) $32.94

Question 75

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?

A) $ 69.31
B) $ 72.96
C) $ 79.38
D) $ 86.38
E) $100.00

Question 76

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

A) Undervalued by $3.03.
B) Overvalued by $3.03.
C) Correctly valued.
D) Overvalued by $2.25.
E) Undervalued by $2.25.

Question 77

Hadlock Healthcare expects to pay a $3.00 dividend at the end of the year (D1 = $3.00). The stock's dividend is expected to grow at a rate of 10 percent a year until three years from now (t = 3). After this time, the stock's dividend is expected to grow at a constant rate of 5 percent a year. The stock's required rate of return is 11 percent. What is the price of the stock today?

A) $49
B) $54
C) $64
D) $52
E) $89

Question 78

Motor Homes Inc. (MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes. The company expects earnings and dividends to grow at a rate of 20 percent for the next 4 years, after which time there will be no growth (g = 0) in earnings and dividends. The company's last dividend was $1.50. MHI's beta is 1.6, the return on the market is currently 12.75 percent, and the risk-free rate is 4 percent. What should be the current price per share of common stock?

A) $15.17
B) $17.28
C) $22.21
D) $19.10
E) $24.66

Question 79

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) 3.93%
B) 4.60%
C) 10.00%
D) 7.54%
E) 2.33%

Question 80

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?

A) 13%
B) 10%
C) 4%
D) 8%
E) -2%