Deck 6: Stocks and Stock Valuation

Question 1

Based on the DDM, if the required return on a stock increases, what will happen to the stock's price?

A) It will increase.
B) It will decrease.
C) It will remain the same.
D) There is not sufficient information to answer this question.

Answer 1

It will decrease.

Question 2

Based on the DDM, if the dividend growth rate increases, what will happen to the stock's price?

A) It will increase.
B) It will decrease.
C) It will remain the same.
D) There is not sufficient information to answer this question.

Answer 2

It will increase.

Question 3

Which of the following items is not a characteristic of a common stock?

A) It represents ownership in the firm.
B) It offers the chance for the firm to remain in business forever.
C) It gives the owner priority if the firm files for bankruptcy.
D) It represents a claim against future common dividends.
E) Its market value is constantly changing.

Answer 3

It gives the owner priority if the firm files for bankruptcy.

Question 4

Which of the following items is not used in calculating the value of a stock?

A) Cost of common equity.
B) Interest rate.
C) Dividend.
D) Dividend growth rate.
E) Cash flow from assets.

Question 5

Under which of the following circumstances can you not use the DDM to value a stock?

A) When interest rates are higher than stock returns.
B) When the dividend is not expected to grow.
C) During an economic contraction.
D) When the dividend growth rate is higher than the required return to the stock.
E) When the firm is expected to file for bankruptcy.

Question 6

Which of the following items is a characteristic of preferred stock?

A) It represents ownership in the firm.
B) Preferred stock owners are taxed at a lower rate.
C) It can be used to purchase the firm's bonds.
D) It represents a claim against future common dividends.
E) It gives the owner priority if the firm files for bankruptcy.

Question 7

Garner Electronics pays a preferred dividend of $7.50. If the required return on Garner's preferred stock is 6.00%, what is the price of Garner's preferred stock?

Question 8

Edwards International's preferred stock sells for $70 per share. If the required return on Edwards' preferred stock is 7.50%, how much is Edwards' preferred dividend?

Question 9

Burkhead Sales just paid an annual dividend of $0.70, and the dividend is expected to grow at a constant rate of 7.00% in the future. If the required return on Burkhead's stock is 10.50%, what is the intrinsic price of the shares?

Question 10

Anthony Inc.'s common stock is currently selling for $20.00 per share. Their most recent annual dividend was $0.60, and the dividend is expected to grow at the rate of 10% annually in the future. What is the required return on Anthony's common equity?

Question 11

Fester Industries' common stock is currently selling for $30.00 per share. Next year's dividend (D₁) is expected to be $1.26. If the required return on Fester's common stock is 9.20%, what was the most recent dividend that Fester paid (D₀)?

Question 12

Gerard Consolidated's last annual dividend was $1.40. The dividend is expected to grow by 20% this year, 16% next year, 12% the year after next and 8% from the following year forward. If the required return on Gerard's common stock is 13.50%, what is the intrinsic value of Gerard's common stock?

Question 13

Allyson Enterprises just lost a big lawsuit. Their most recent dividend was $0.88, and that dividend is expected to grow by 2% in year 1, 4% in year 2, 5% in year 3 and 6% in year 4 and beyond. If the required return on Allyson's common stock is 10.50%, what is the intrinsic value of the stock?

Question 14

One year ago today you bought 600 shares of Mullen Manufacturing's common stock for $42.50 per share. During the past year you received two quarterly dividends of $0.35 each and two quarterly dividends of $0.38 each. Today the stock's market price is $44.20. Calculate the dividend yield, capital gains yield and total yield on the stock for the past year.

Question 15

Use the following data to answer questions below
Gaspar International does not pay a common dividend. Gaspar's FCF for 2015 was $20.0 million, for 2016 it was $21.0 million, for 2017 it was $22.05 million and for 2018 it was $23.1525 million. Gaspar's WACC is known to be 9.50%. Gaspar's balance sheet includes $26.4 million in marketable securities and $130.0 million in non-operating long-term assets. The firm currently carries $44.0 million in short-term debt, $160.0 million in long-term debt and $22.0 million in preferred equity. There are currently 10 million shares of Gaspar's common stock outstanding.
-Use the FCF data above to estimate the growth rate for Gaspar's free cash flows.

Question 16

Use the following data to answer questions below
Gaspar International does not pay a common dividend. Gaspar's FCF for 2015 was $20.0 million, for 2016 it was $21.0 million, for 2017 it was $22.05 million and for 2018 it was $23.1525 million. Gaspar's WACC is known to be 9.50%. Gaspar's balance sheet includes $26.4 million in marketable securities and $130.0 million in non-operating long-term assets. The firm currently carries $44.0 million in short-term debt, $160.0 million in long-term debt and $22.0 million in preferred equity. There are currently 10 million shares of Gaspar's common stock outstanding.
-Use the data above and the g_FCF you estimated to calculate the value of Gaspar's operations as of the end of 2018.

Question 17

Use the following data to answer questions below
Gaspar International does not pay a common dividend. Gaspar's FCF for 2015 was $20.0 million, for 2016 it was $21.0 million, for 2017 it was $22.05 million and for 2018 it was $23.1525 million. Gaspar's WACC is known to be 9.50%. Gaspar's balance sheet includes $26.4 million in marketable securities and $130.0 million in non-operating long-term assets. The firm currently carries $44.0 million in short-term debt, $160.0 million in long-term debt and $22.0 million in preferred equity. There are currently 10 million shares of Gaspar's common stock outstanding.
-Use the data above and your calculations from questions 15 and 16 to estimate the value of the firm as of the end of 2018.

Question 18

Use the following data to answer questions below
Gaspar International does not pay a common dividend. Gaspar's FCF for 2015 was $20.0 million, for 2016 it was $21.0 million, for 2017 it was $22.05 million and for 2018 it was $23.1525 million. Gaspar's WACC is known to be 9.50%. Gaspar's balance sheet includes $26.4 million in marketable securities and $130.0 million in non-operating long-term assets. The firm currently carries $44.0 million in short-term debt, $160.0 million in long-term debt and $22.0 million in preferred equity. There are currently 10 million shares of Gaspar's common stock outstanding.
-Use the data above and your calculations from questions 15, 16 and 17 to estimate the value of the firm's common equity as of the end of 2018.

Question 19

Use the following data to answer questions below
Gaspar International does not pay a common dividend. Gaspar's FCF for 2015 was $20.0 million, for 2016 it was $21.0 million, for 2017 it was $22.05 million and for 2018 it was $23.1525 million. Gaspar's WACC is known to be 9.50%. Gaspar's balance sheet includes $26.4 million in marketable securities and $130.0 million in non-operating long-term assets. The firm currently carries $44.0 million in short-term debt, $160.0 million in long-term debt and $22.0 million in preferred equity. There are currently 10 million shares of Gaspar's common stock outstanding.
-Use the data above and your calculations from questions 15 through 18 to estimate the intrinsic value per share of the firm's common stock as of the end of 2018.