Deck 7: Valuing Stocks

Question 1

What is the difference between common stock and preferred stock?

Answer 1

Preferred stock has preference over common stock in the distribution of dividends or liquidation. A firm may not pay a dividend to common stockholders unless they pay the promised dividend to preferred shareholders first.

Question 2

Midwest Corporation is expected to pay an annual dividend of $0.45 per share in the coming year,and to trade for $31.10 at the end of the year.If investments with the same risk as Midwest's stock have an expected return of 8.5%,what is the most you would pay today for Midwest's stock?

A) $31.10
B) $29.08
C) $31.55
D) $28.25
E) $30.65

Answer 2

$29.08

Question 3

Maple Corporation is expected to pay an annual dividend of $0.45 per share in the coming year,and to trade for $12.50 at the end of the year.If investments with the same risk as Maple's stock have an expected return of 6.95%,what is Maple's dividend yield?

A) 3.7%
B) 3.6%
C) 3.5%
D) 4.0%
E) 3.4%

Answer 3

3.7%

Question 4

What is the difference between cumulative and non-cumulative preferred stock?

Question 5

Roswell Inc.is expected to pay an annual dividend of $0.66 per share in the coming year,and to trade for $9.25 at the end of the year.If investments with the same risk as Roswell's stock have an expected return of 11%,what is Roswell's capital gain rate?

A) 3.9%
B) 3.8%
C) 3.5%
D) 3.7%
E) 3.6%

Question 6

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?

A) $32.44
B) $32.48
C) $32.99
D) $35.29
E) $32.84

Question 7

Which of the following situations is a potential source of cash flows for a shareholder of a certain stock? I.The investor may be able to sell the shares at a future date.
II)The firm in which the shares are held might pay out cash to shareholders in the form of dividends.
III)The firm in which the shares are held might increase the value of its shares by reducing the total number of shares outstanding.

A) I only
B) II only
C) I and II
D) II and III
E) I and III

Question 8

The net present value (NPV)of a stock is calculated by discounting cash flows arising from this stock using the risk-free interest rate.

Question 9

Jessie Inc.is expected to pay an annual dividend of $1.10 per share in the coming year,and to trade for $53.45 at the end of the year.If investments with the same risk as Jessie's stock have an expected return of 7.5%,what is Jessie's dividend yield?

A) 2.0%
B) 2.1%
C) 2.2%
D) 2.3%
E) 2.5%

Question 10

The Valuation Principle states that the value of a stock is equal to the present value (PV)of both the dividends and future sale price of that stock which the investor will receive.

Question 11

The ownership in a corporation is divided into shares of stock,which carry rights to share in the profits of the firm through future dividend payments.

Question 12

Northern Railways has a current stock price of $56.75 and is expected to pay a dividend of $1.15 in one year.If Northern's equity cost of capital is 12%,what price would Northern's stock be expected to sell for immediately after it pays the dividend?

A) $57.65
B) $63.56
C) $62.41
D) $57.78
E) $55.60

Question 13

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?

A) $0.49
B) $0.27
C) $0.24
D) $0.03
E) $0.18

Question 14

Danforth Corp has a current stock price of $117.15 and is expected to pay a dividend of $4.50 in one year.If Danforth's equity cost of capital is 10%,what price would Danforth's stock be expected to sell for immediately after it pays the dividend?

A) $124.37
B) $128.87
C) $121.65
D) $112.65
E) $113.06

Question 15

What are dividend payments?

A) payments made to a company by investors for a share of the ownership of that company
B) incremental increases in the value of the stock held by an investor due to rises in share price
C) the difference between the original cost price of a share and the price an investor receives when that share is sold
D) a part share of the profits or earnings of a company paid to each shareholder on the basis of the number of shares they hold
E) periodic payments to the bondholders

Question 16

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).What is Logitech International SA (USA)'s ticker symbol?

A) LIS
B) LOGITECH
C) LOG
D) LOGI
E) NASDAQ

Question 17

Ashbury Inc.is expected to pay an annual dividend of $1.50 per share in the coming year,and to trade for $36.25 at the end of the year.If investments with the same risk as Ashbury's stock have an expected return of 8.75%,what is Ashbury's capital gain rate?

A) 4.7%
B) 4.1%
C) 4.3%
D) 4.4%
E) 4.2%

Question 18

Use the figure for the question(s) below.

The above screen shot above from Google Finance shows the price history of Progenics,a pharmaceutical company.In the time period shown,Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial.In which of the months shown in the price history is this most likely to have occurred?

A) February 2008
B) March 2008
C) April 2008
D) May 20008
E) January 2008

Question 19

Use the figure for the question(s) below.

The above screen shot from Google Finance shows basic stock information for PepsiCo.If you owned 2000 shares of PepsiCo for the period shown,how much would you have earned in dividend payments?

A) $108.33
B) $120.00
C) $760.00
D) $860.00
E) $1020.00

Question 20

Fanshaw Corporation is expected to pay an annual dividend of $0.20 per share in the coming year,and to trade for $15.15 at the end of the year.If investments with the same risk as Fanshaw's stock have an expected return of 10.75%,what is the most you would pay today for Fanshaw's stock?

A) $15.15
B) $15.35
C) $13.50
D) $14.95
E) $13.86

Question 21

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

A) $16.67
B) $25.01
C) $33.34
D) $41.68
E) $12.50

Question 22

A stock is expected to pay $3.20 per share every year indefinitely and the equity cost of capital for the company is 10%.What price would an investor be expected to pay per share next year?

A) $8.00
B) $16.00
C) $24.00
D) $32.00
E) $35.20

Question 23

Bondi Company is expected to pay a quarterly dividend of $0.45 for the next five years.If the current price of Bondi stock is $17.62,and Bondi's equity cost of capital is 12% per year,what price would you expect Bondi's stock to sell for at the end of the five years?

A) $26.62
B) $17.62
C) $17.92
D) $19.11
E) $28.19

Question 24

A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.

Question 25

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?

A) 5%
B) 7%
C) 9%
D) 13%
E) 15%

Question 26

Canberra Corp expects to have earnings per share of $8.40 in the coming year.Canberra has a return on new investment of 14%.If the firm's dividend payout rate is 75%,and its equity cost of capital is 9%,what is the value of Canberra's stock?

A) $114.55
B) $152.72
C) $70.00
D) $93.33
E) $129.23

Question 27

Cook Pharmaceuticals plans to pay $1.55 per share in dividends in the coming year.If its equity cost of capital is 8%,and dividends are expected to grow by 3% per year in the future,what is the value of Cook's stock?

A) $31.00
B) $19.38
C) $51.67
D) $28.70
E) $55.80

Question 28

Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount indefinitely.If Matilda's equity cost of capital is 12%,which of the following would be expected to be closest to Matilda's stock price?

A) $12.25
B) $14.65
C) $18.75
D) $21.98
E) $22.35

Question 29

Credenza Industries is expected to pay a dividend of $1.20 at the end of the coming year.It is expected to sell for $62.00 at the end of the year.If its equity cost of capital is 8%,what is the expected capital gain from the sale of this stock at the end of the coming year?

A) $3.48
B) $4.86
C) $14.28
D) $58.52
E) $62.00

Question 30

Bentham Books pays annual dividends and has just paid this year's dividend of $0.65.If its equity cost of capital is 12%,and dividends are expected to grow by 3% per year in the future,what is the value of Bentham's stock?

A) $5.42
B) $7.22
C) $7.44
D) $21.67
E) $5.58

Question 31

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?

A) $39.27
B) $40.22
C) $41.45
D) $42.40
E) $43.50

Question 32

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?

A) $24.00
B) $25.20
C) $12.60
D) $12.00
E) $26.00

Question 33

Herring Fisheries plans to pay $0.65 per share in dividends in the coming year.If its equity cost of capital is 11%,and dividends are expected to grow by 2.5% per year in the future,what is the value of Herring's stock?

A) $24.05
B) $7.84
C) $5.91
D) $7.65
E) $26.00

Question 34

Wellington Corporation is expected to pay a monthly dividend of $0.12 for the next three years.If the current price of Wellington stock is $41.35,and Wellington's equity cost of capital is 15% per year,what price would you expect Wellington's stock to sell for at the end of the three years?

A) $41.35
B) $45.67
C) $59.26
D) $62.47
E) $57.55

Question 35

Garville Corporation has a current stock price of $7.43 and is expected to sell for $8.14 in one year's time,immediately after it pays a dividend of $0.35.Which of the following is closest to Garville's equity cost of capital?

A) 4.8%
B) 6.1%
C) 6.7%
D) 9.6%
E) 14.3%

Question 36

A stock is expected to pay $0.80 per share every year indefinitely.If the current price of the stock is $18.90,and the equity cost of capital for the company that released the shares is 6.4%,what price would an investor be expected to pay per share five years into the future?

A) $12.50
B) $20.43
C) $21.23
D) $22.65
E) $22.90

Question 37

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?

A) 9%
B) 12%
C) 18%
D) 22%
E) 26%

Question 38

A stock is bought for $22.00 and sold for $26.00 one year later,immediately after it has paid a dividend of $1.50.What is the capital gain rate for this transaction?

A) 0.27%
B) 4.00%
C) 15.00%
D) 18.18%
E) 20.00%

Question 39

Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years.If the current price of Coolibah stock is $22.40,and Coolibah's equity cost of capital is 16%,what price would you expect Coolibah's stock to sell for at the end of three years?

A) $26.74
B) $28.82
C) $29.34
D) $31.36
E) $29.60

Question 40

Rylan Industries is expected to pay a dividend of $5.20 per year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

A) $29.52
B) $55.11
C) $25.58
D) $80.70
E) $11.83

Question 41

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?

A) $16.67
B) $19.23
C) $24.75
D) $28.57
E) $31.86

Question 42

You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:

A) $17.00
B) $10.75
C) $27.75
D) $43.50
E) $37.50

Question 43

Kirkevue Industries pays out all its earnings as dividends and has a share price of $24.In order to expand,Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained funds.What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?

A) 0.83%
B) 15.33%
C) 18.23%
D) 17.97%
E) 12.35%

Question 44

Spacefood Products will pay a dividend of $2.40 per share at the end of this year.It is expected that this dividend will grow by 3% per year each year in the future.What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 10%?

A) $24.00
B) $23.97
C) $30.22
D) $34.29
E) $37.76

Question 45

Assuming everything else remains unchanged,how does a firm's decision to increase its dividend-payout ratio affect its growth rate?

Question 46

Gremlin Industries will pay a dividend of $1.80 per share at the end of this year.It is expected that this dividend will grow by 4% per year each year in the future.The current price of Gremlin's stock is $22.40 per share.What is Gremlin's equity cost of capital?

A) 11%
B) 12%
C) 14%
D) 16%
E) 18%

Question 47

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

A) $25.00
B) $15.00
C) $31.25
D) $27.50
E) $29.75

Question 48

Xport International just announced that it plans to cut its dividend from $1.75 to $1.00 per share and use the extra funds to expand its operations.Prior to this announcement,Xport's dividends were expected to grow at 5% per year and Xport's stock was trading at $35.00 per share.With the new expansion,Xport's dividends are expected to grow at 7% per year indefinitely.Assuming that Xport's risk is unchanged by the expansion,the value of a share of Xport after the announcement is closest to:

A) $30.00
B) $33.33
C) $35.00
D) $37.50
E) $50.00

Question 49

Kilbright Corporation stock is currently trading at $73.29 per share and pays a dividend of $3.14 per share this year.The company's cost of equity is 13%.What is the expected annual growth rate of the company's dividends?

A) 11.2%
B) 6.8%
C) 4.3%
D) 17.3%
E) 8.7%

Question 50

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBS stock is closest to:

A) $25.00
B) $40.00
C) $15.40
D) $11.10
E) $10.00

Question 51

Sunnyfax Publishing pays out all its earnings and has a share price of $38.In order to expand,Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds.Once the funds are reinvested,they are expected to grow at a rate of 12%.If the reinvestment does not affect Sunnyfaxs equity cost of capital,what is the expected share price as a consequence of this decision?

A) $33.33
B) $40.00
C) $50.00
D) $60.00
E) $65.00

Question 52

You expect KT industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

A) 6.0%
B) 7.5%
C) 4.5%
D) 3.0%
E) 2.0%

Question 53

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:

A) $10.00
B) $15.00
C) $14.00
D) $12.50
E) $13.00

Question 54

The Sisyphean Company's common stock is currently trading for $25.00 per share.The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%.If the dividend payout rate is expected to remain constant,then the expected growth rate in the Sisyphean Company's earnings is closest to:

A) 8%
B) 6%
C) 4%
D) 2%
E) 0%

Question 55

Avril Synchronistics will pay a dividend of $1.30 per share this year.It is expected that this dividend will grow by 5% each year in the future.What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 14%?

A) $9.23
B) $9.28
C) $14.44
D) $15.16
E) $16.21

Question 56

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%.Luther Industries' dividends are expected to grow at a constant rate indefinitely.The growth rate of Luther's dividends is closest to:

A) 7.5%
B) 5.5%
C) 16.5%
D) 12%
E) 4.5%

Question 57

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?

A) $33.33
B) $38.96
C) $48.30
D) $52.00
E) $54.45

Question 58

You expect KT industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The value of a share of KTI's stock is closest to:

A) $39.25
B) $20.00
C) $33.35
D) $12.50
E) $25.75

Question 59

Adelaide Industries expects to have earnings per share of $3.20 in the coming year.Adelaide has a return on new investment of 11%.If the firm's dividend payout rate is 60%,and its equity cost of capital is 8%,what is the value of Adelaide's stock?

A) $24.00
B) $53.33
C) $40.00
D) $88.89
E) $91.43

Question 60

A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?

A) 2%
B) 4%
C) 8%
D) 11%
E) 5%

Question 61

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly.

Question 62

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

A) I only
B) II only
C) III only
D) II and III
E) I and II

Question 63

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?

A) $5.24
B) $2.14
C) $4.68
D) $3.51
E) $11.69

Question 64

What is a major assumption about growth rate in the dividend-discount model?

Question 65

Aaron Inc.has 316 million shares outstanding.It expects earnings at the end of the year to be $602 million.The firm's equity cost of capital is 11.5%.Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares.If Aaron's earnings are expected to grow at a constant 6% per year,what is Aaron's share price?

A) $8.66
B) $17.32
C) $25.98
D) $34.64
E) $12.43

Question 66

Use the table for the question(s) below.

Conundrum Mining is expected to generate the above free cash flows over the next four years,after which they are expected to grow at a rate of 5% per year.If the weighted average cost of capital is 12% and Conundrum has cash of $80 million,debt of $60 million,and 30 million shares outstanding,what is Conundrum's expected current share price?

A) $10.84
B) $13.72
C) $16.16
D) $16.25
E) $17.15

Question 67

Valence Electronics has 217 million shares outstanding.It expects earnings at the end of the year of $760 million.Valence pays out 40% of its earnings in total-15% paid out as dividends and 25% used to repurchase shares.If Valences earnings are expected to grow by 6% per year,these payout rates do not change,and Valence's equity cost of capital is 8%,what is Valences share price?

A) $10.51
B) $24.40
C) $56.60
D) $70.05
E) $85.25

Question 68

Can the dividend-discount model handle negative growth rates?

Question 69

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

Question 70

What are the major limitations of the dividend-discount model?

Question 71

Chittenden Enterprises has 632 million shares outstanding.It expects earnings at the end of the year to be $940 million.The firm's equity cost of capital is 10%.Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares.If Chittenden's earnings are expected to grow at a constant 4% per year,what is Chittenden's share price?

A) $4.96
B) $3.36
C) $7.44
D) $14.88
E) $16.42

Question 72

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?

A) $6.71
B) $6.29
C) $6.55
D) $7.21
E) $6.51

Question 73

Forecasting dividends requires forecasting the firm's future earnings.

Question 74

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

Question 75

Stocks that do not pay a dividend must have a value of $0.

Question 76

If you want to value a firm that has consistent earnings growth,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the

A) enterprise value model.
B) dividend-discount model.
C) total payout model.
D) discounted free cash flow model.
E) net present value model.

Question 77

Flinders Corporation's shares currently cost $32.00,and it has 80 million shares outstanding.If it pays out 70% of its earnings in total and its equity cost of capital is 10 percent,what are Flinders' earnings,given that these earnings are expected to grow by 5% per year in the future?

A) $73.14 million
B) $85.33 million
C) $120.64 million
D) $182.86 million
E) $206.32 million

Question 78

How can the dividend-discount model handle changing growth rates?

Question 79

Tarmac Airlines has 115 million shares outstanding and expects earnings at the end of this year of $370 million.Tarmac plans to pay out 40% of its earnings as a dividend and 20% of its earnings through share repurchases.The firm has an equity cost of capital of 8%.If Tarmac' earnings are expected to grow by 3% per year and these payout rates remain constant,what is Tarmac's share price?

A) $38.61
B) $24.13
C) $64.35
D) $25.74
E) $16.09

Question 80

If a firm has leverage,it is best to use the total payout model to determine the firm's value.