Deck 5: Valuing Stocks

Question 1

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

A) $18.32
B) $22.28
C) $21.22
D) $17.44

Answer 1

$22.28

Question 2

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

A) $11.21
B) $18.32
C) $17.44
D) $25.37

Answer 2

$18.32

Question 3

Which of the following stock exchanges has the most strict listing requirements?

A) American Stock Exchange
B) NASDAQ
C) New York Stock Exchange
D) Pacific Stock Exchange

Answer 3

New York Stock Exchange

Question 4

The first public sale of company stock to outside investors is called a/an

A) seasoned equity offering.
B) shareholders' meeting.
C) initial public offering.
D) proxy fight.

Question 5

Miller Juice,Inc.is expected to pay a $3.00 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

A) $60.00
B) $54.15
C) $49.39
D) $53.70

Question 6

Bavarian Sausage,Inc.has preferred stock outstanding.This stock pays a semiannual dividend of $1.25.If the next dividend is paid six months from now and the annual required return is 10%,what should be the value of the preferred stock?

A) $6.25
B) $25
C) $12.50
D) $50.00

Question 7

Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock today.

A) $18.32
B) $17.44
C) $11.21
D) $25.37

Question 8

What is the market capitalization of a company?

A) The market value of all outstanding debt.
B) The book value of the company's debt.
C) The market value of all outstanding shares.
D) The book value of the company's total equity.

Question 9

Miller Juice traditionally retains 65% of its earnings for future investments.Last year Miller's return on equity was 15%.What is Miller's growth rate?

A) 15.00%
B) 9.75%
C) 5.25%
D) 18.38%

Question 10

Bavarian Sausage free cash flow for the current year is $6,750,000 and investors believe that the company's free cash flow will grow by 5% annually forever.If Bavarian sausage's weighted average cost of capital is 15%,what is their enterprise value?

A) $67,500,000
B) $85,350,000
C) $56,780,000
D) $70,875,000

Question 11

Which statement about common shareholders is incorrect?

A) Shareholders only have a residual claim.
B) Shareholders have precedence over all other claimholders in the case of bankruptcy.
C) Shareholders have a voting right.
D) Shareholders are the ultimate owners of a corporation.

Question 12

Which of the following is not a difficulty associated with valuing common stock?

A) Common stock does not have a specific expiration date.
B) The required rate of return is difficult to estimate.
C) Common stock does not promise a fixed cash flow stream.
D) All of the above are considered difficulties associated with valuing common stock.

Question 13

Miller Juice traditionally pays out 35% of its earnings as dividends.Last year Miller's earnings available for common stockholders were $256 million and the book value of its equity was $678 million.What is Miller's growth rate?

A) 24.54%
B) 35.00%
C) 37.76%
D) 13.22%

Question 14

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the market value of its preferred stock is $5,000,000.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

A) $14.86
B) $21.43
C) $13.43
D) $6.57

Question 15

Miller Juice,Inc.just paid a $3 dividend.The company is expected to pay a $3.50 dividend next year and a $4 dividend in two years.After that,dividends are expected to grow at 5% forever.If investors require a return of 12% on the investment,what should Miller Juice stock sell for today?

A) $54.15
B) $49.63
C) $57.15
D) $60.00

Question 16

Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the company does not have any preferred stock outstanding.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?

A) $21.43
B) $14.86
C) $28.00
D) $6.57

Question 17

Miller Juice,Inc.is not paying a dividend right now,but is expected to pay a $4.56 dividend two years from now.Investors expect that dividend to grow by 4% every year forever.If the required return on the stock investment is 14%,what should be the price of Miller Juice stock today?

A) $53.69
B) $36.49
C) $47.42
D) $43.84

Question 18

Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever.If the required return on the stock investment is 14%,what should be the price of the stock in 5 years?

A) $18.32
B) $23.33
C) $17.44
D) $22.26

Question 19

Smith Construction,Inc.is expected to pay a $2.78 dividend next year.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

A) $7.46
B) $28.91
C) $35.06
D) $9.31

Question 20

Smith Construction,Inc.just paid a $2.78 dividend.The dividend is expected to grow by 4% each year for the next three years.After that the company will never pay another dividend ever again.If your required return on the stock investment is 10%,what should the stock sell for today?

A) $7.46
B) $28.91
C) $46.33
D) $15.63

Question 21

Which of the following is not the responsibility of the lead underwriter for an equity issuance?

A) price stabilization of the issue
B) exercises discretion over the distribution of shares for sale among the syndicate and the selling group
C) must buy the shares in the green shoe option
D) many times serves as the market maker for trading in the issuers securities

Question 22

AlwaysAround Co.has just issued a preferred stock that pays an annual $4 dividend.The first dividend will be received one year from today.If the required rate of return on this stock is 5%,then what is the price of the stock?

A) $3.81
B) $4.20
C) $80.00
D) none of the above

Question 23

The Over-the-Counter Market for trading equity securities is located

A) in New York City.
B) in Chicago.
C) in Boston.
D) none of the above

Question 24

Bavarian Sausage is expected to pay a $1.57 dividend next year.If the required return on the stock investment is 14%,and the stock currently sells for $34.37,what is the implied dividend growth rate for this company?

A) 6.37%
B) 9.43%
C) 12.68%
D) 15.76%

Question 25

When valuing a preferred stock,the type of security that we treat the preferred stock like,for valuation purposes,is

A) a bond.
B) a perpetuity.
C) a common stock.
D) none of the above.

Question 26

The vast majority of initial public offerings have underwriting spreads that cost the firm what percentage of the net capital raised?

A) 0.5%
B) 7.0%
C) 7.5%
D) 8.0%

Question 27

Bavarian Sausage just paid a $1.57 dividend.If the required return on the stock investment is 14%,and the stock currently sells for $34.37,what is the implied dividend growth rate for this company?

A) 9.02%
B) 6.39%
C) 12.68%
D) 9.43%

Question 28

The Perp,Inc.has a preferred stock that will pay its next annual $5 dividend one year from now.The current price of the stock is $110.What is the required rate of return on the stock?

A) 4.55%
B) 4.00%
C) 5.50%
D) 22.00%

Question 29

MeFirst Corporation has a cumulative preferred share issue that is suppose to pay a quarterly dividend of $2.MeFirst failed to pay 3 consecutive dividends to investors and then managed to pay a common share dividend the very next quarter.How much cash must MeFirst have paid to each preferred share holder at that time?

A) $2 per share
B) $6 per share
C) $8 per share
D) $10 per share

Question 30

You are approached about purchasing a share of common stock in a company that will definitely go out of business exactly 2 years from today.The company is anticipated to pay a $10 dividend one year from now and a $15 dividend two years from now (immediately before it goes out of business).What price are you willing to pay for the stock if the required rate of return on the stock is 5%?

A) $22.68
B) $23.13
C) $23.81
D) $25.00

Question 31

Which of the following securities poses the greatest financial risk for the investor?

A) common equity
B) preferred equity
C) debt
D) convertible debt

Question 32

If the required return on the stock investment is 13%,what should be Miller's stock price today?

A) $19.69
B) $6.24
C) $15.62
D) $10.37

Question 33

If viewing a stock quote from the Wall Street Journal,the columns labeled "HI" and "LO" refer to

A) the highest and lowest prices at which the stock was sold in the last fifty-two weeks.
B) the highest and lowest prices at which the stock was sold in the last six months.
C) the highest and lowest prices at which the stock was sold in the last month.
D) the highest and lowest prices at which the stock was purchased in the last month.

Question 34

If the required return on the stock investment is 13%,what should be Miller's stock price immediately after the first dividend was paid?

A) $6.24
B) $19.69
C) $16.28
D) $21.19

Question 35

Retained earnings represents

A) a pool of cash that the firm can use should a need for cash arise.
B) the increased market value,due to managements efforts,of all of the firms equity securities issued.
C) earnings that a firm reinvested during the firm's history.
D) the cumulative amount of cash that the firm has paid out in dividends.

Question 36

Usually,only the riskiest type of firms will offer securities to the general public through

A) a firm-commitment offering.
B) a competitive offering.
C) a negotiated offering.
D) a best-efforts arrangement.

Question 37

If the required return on the stock investment is 13%,what should be Miller's stock price five years from today?

A) $11.50
B) $6.24
C) $19.69
D) $16.28

Question 38

Which of the following is not an important consideration when an underwriter is trying to establish the price for an initial public offering?

A) the underwriter's reputation
B) the value of the firm
C) the demand for the securities of the issuer
D) providing the absolute maximum price possible for the issuer of the shares

Question 39

The largest stock exchange in the world is

A) the London Stock Exchange.
B) the New York Stock Exchange.
C) the NASDAQ.
D) the Paris Bourse.

Question 40

Which of the following investors can force a firm into bankruptcy court if the firm does not pay the expected cash flow to the investor?

A) common equity investor
B) preferred equity investor
C) debt investor
D) none of the above

Question 41

Static Utility Company anticipates its revenues,and consequently its common stock dividends,will remain flat forever.It currently pays an annual dividend of $20 per year.If it pays the next dividend exactly one year from today,then what is the price of Static's common shares if the required rate of return is 12%?

A) $24.00
B) $40.00
C) $166.67
D) $200.00

Question 42

Borrower Corp.has the ability to produce $4,000,000 of free cash flow next year and expects that to grow by 2% per year thereafter.If Borrower's weighted average cost of capital is 13%,then what is the value of Borrower?

A) $40,000,000.00
B) $30,769,230.77
C) $36,363,636.36
D) none of the above

Question 43

You are asked by the Chief Financial Officer of your firm to predict what the firm's stock price will be exactly 4 years from today.If your firm is expected to grow at 3% indefinitely and the cost of capital is 10% while the expected annual dividend one year from today is $10,then what should be the price of your firm's stock 4 years from today?

A) $142.86
B) $160.79
C) $112.55
D) none of the above

Question 44

What is the expected dividend for ABC in year 2?

A) $1.65
B) $1.73
C) $1.82
D) $1.91

Question 45

Suppose you plan on buying a stock today and holding it for one year.The stock will pay you a dividend EXACTLY in one year on the day you will sell.You believe the selling price in one year will be $27.10,while the stock will also pay a dividend of $2.40 in one year.If you require 16.60% return to invest in the stock,what is a fair price to pay today?

A) $25.50
B) $25.30
C) $23.24
D) $21.18

Question 46

What is the intrinsic value (or current price)of ABC?

A) $21.00
B) $22.98
C) $23.41
D) $24.48

Question 47

Suppose that you estimate D₁=$0.72,D₂=$0.76,D₃=$0.84,and D₄=$0.88 for a stock.You also estimate that,beginning at year 4,dividends will grow continually at a rate of 2% per year.If the required return to hold the stock is 14.6%,what is the stock's current price?

A) $6.20
B) $6.25
C) $6.30
D) $6.40

Question 48

The market value of Bulldog Industries debt and preferred stock is $934 million.If the firm has a weighted average cost of capital of 10%,find the equity value of the firm's stock.The firm has 50 million shares of stock outstanding.(assume that we are at January 1,2004…)

A) $14.63
B) $16.23
C) $17.03
D) $22.63

Question 49

What will be the dividend in two years for Kramerica?

A) $2.21
B) $2.40
C) $2.52
D) $2.88

Question 50

ConsGrough,Inc.has increased its annual common dividend by 3% in each of the years that the company has existed.If you believe that the company can continue to do so indefinitely,then what is the required rate of return if the price of ConsGrough is $171.67 and the dividend that it paid yesterday was $5?

A) .029
B) .03
C) .06
D) none of the above

Question 51

Predictable Corp has increased its annual dividend each year of its life by 2% (and will continue to do so indefinitely).If Predictable paid its annual dividend yesterday of $8 and the cost of capital is currently 4%,then by what amount will the stock price decrease by if the cost of capital increases to 5%?

A) $408.00
B) $272.00
C) $136.00
D) none of the above

Question 52

Last year Sample Corp.had earnings of $3 a share based upon a common share book value of $25 per share.If Sample paid a dividend of $1.50 last year then estimate Sample's growth rate.

A) 6%
B) 12%
C) 50%
D) none of the above

Question 53

A stock just paid a $2.00 dividend this morning.You believe that dividends will grow constantly starting today at a rate of 5% per year.If you require a 10% to own this stock,what is a fair price to pay for the stock?

A) $40.00
B) $41.00
C) $42.00
D) $43.00

Question 54

Equal,Inc.is financed with equal portions of debt and equity.The after-tax cost of debt is 6% and the cost of equity is 8%.If Equal expects next year's free cash flow to be $25,000,000 with growth of 3% thereafter,what is the value of Equal,Inc.to the nearest dollar? Equal's marginal tax rate is 35%.

A) $357,142,857
B) $625,000,000
C) $833,333,333
D) none of the above

Question 55

ConsGrough,Inc.has increased its annual common dividend by 3% in each of the years that the company has existed.If you believe that the company can continue to do so indefinitely,then what price would you be will to pay for ConsGrough if the required rate of return is 6% and the dividend that it paid yesterday was $5?

A) $85.83
B) $166.67
C) $171.67
D) $200.00

Question 56

Suppose you want to buy ABC and hold it for the next 4 years.What would the selling price be for ABC in 4 years,assuming that none of our assumptions change?

A) $28.01
B) $28.76
C) $29.40
D) $30.80

Question 57

Which is TRUE concerning preferred stock?

A) Preferred stock is considered debt on the company balance sheet.
B) Preferred stock holders have voting rights for the company board of directors.
C) Preferred stock payments are variable like common stock.
D) Preferred stock is viewed as less risky than a firm's common stock.

Question 58

Balance Corp.has a weighted average cost of capital equal to 5.5%.If the firm is financed with 25% equity and 75% debt and if the after-tax of that debt is 4%,then what is the cost of equity for the firm?

A) .025
B) .06
C) .1
D) none of the above

Question 59

If Bulldog Industries has a weighted average cost of capital of 10%,find the market value of the firm.(assume that we are at January 1,2004)

A) $2,085.26
B) $1,946.52
C) $1,745.45
D) $1,665.45

Question 60

What is the equation to price Kramerica stock?

A)P₀

B)P₀

C) P₀

D)P₀

Question 61

A firm plans on paying a constant dividend of $2 per share into the foreseeable future.If investors seek a 12% return to hold the firm's stock,what is fair value for the company's stock?

A) $13.67
B) $15.67
C) $16.67
D) $18.67

Question 62

Debt holders:

A) are the residual owners of a corporation.
B) have little say in how the firm conducts its business.
C) cannot force the firm into bankruptcy court if it fails to make the scheduled interest and principal payments on time.
D) are willing to accept more risk than the stockholders in the corporation.

Question 63

Which of the following statements is false?

A) Dual-class stock is more prevalent in the United States than it is in other countries.
B) When a corporation has dual-class stock,the corporate insiders generally concentrate their holdings in the superior voting-share class,while ordinary investors tend to hold relatively more of the inferior voting-class stock.
C) One purpose of a dual-class structure is to allow insiders to raise the capital needed to finance growth without losing voting control.
D) All of the above statements are false.
E) Only statements (a)and (b)are false.

Question 64

Which is NOT a feature of common stock?

A) Voting rights
B) Priority over debt holders for liquidation rights
C) Rights to dividends and other distributions
D) Majority voting system

Question 65

A share of preferred stock pays a $2 annual dividend,but pays the dividend in four equal quarterly installments.Investors seek a 12% annual percentage return on the investment.What price should the preferred stock trade?

A) $4.17
B) $6.67
C) $8.50
D) $16.67

Question 66

Stone Cold Incorporated reported net income of $10 million for 2003.In addition,shareholder equity for the firm was $80 million at the end of 2003.The company was able to pay $3 million out as dividends to the shareholders for 2003.After 2003,excess paid-in-capital was $60 million.Given this information,what is the growth rate available for Stone Cold?

A) 3.75%
B) 5.00%
C) 7.50%
D) 8.75%

Question 67

What is the largest (trading volume)over-the-counter (OTC)market in the United States?

A) AMEX
B) NYSE
C) Nasdaq
D) Chicago Board of Trade

Question 68

You estimate the following cash flows for Nick's Incorporated: D₁=$0.83,D₂=$0.87,D₃=$0.96,and P₃=$27.40.If the required return to hold Nick's stock is 15.1%,what is the price today for Nick's stock?

A) $18.31
B) $18.85
C) $19.98
D) $20.35

Question 69

The decision as to whether or not a firm will pay dividends is explicitly made by the:

A) stockholders
B) bondholders
C) Board of Directors
D) Chief Financial Officer
E) Chief Executive Officer

Question 70

NARRBEGIN: Normaltown Corporation
Normaltown Corporation
An analyst has predicted the free cash flows for Normaltown Corporation for the next four years:

After 2007,the free cash flows are expected to grow at an annual rate of 5%.The weighted average cost of capital for Normaltown is 12%.If the market value of the firm's debt is $100 million,find the value of the firm's equity.

A) $201.81 million
B) $213.00 million
C) $231.43 million
D) $271.20 million

Question 71

For a stock pricing model,an analyst selects 10% as the sustainable growth rate in dividends for a firm.Given that the firm pays out 40% of net income as dividends each year,what is the return on shareholder equity for this firm?

A) 2.50%
B) 4.00%
C) 10.00%
D) 16.67%

Question 72

After careful research,you find the present value of the free cash flows of a firm to be $100 million.The market value of the firm's preferred stock is $15 million,while the market value of the firm's debt is $40 million.If the firm has 2 million shares of stock outstanding,what is the equity value per share?

A) $20.00
B) $22.50
C) $27.50
D) $30.00

Question 73

An investor bought a stock this morning for $50,and plans to sell the stock one year from today.The investor believes the stock will pay a $1 dividend during the next year,and that the stock can be sold for $53 in one year.Given the investor's beliefs,what is the return from investing in this stock for the next year?

A) 4%
B) 6%
C) 8%
D) 10%

Question 74

NARRBEGIN: Normaltown Corporation
Normaltown Corporation
An analyst has predicted the free cash flows for Normaltown Corporation for the next four years:

After 2007,the free cash flows are expected to grow at an annual rate of 5%.If the weighted average cost of capital is 12% for Normaltown,find the enterprise value of the firm.

A) $54.98 million
B) $301.81 million
C) $313.00 million
D) $331.43 million

Question 75

One of the most time-consuming aspects of preparing for an equity offering is:

A) preparing the necessary documents for filing with regulators.
B) putting on the road show so that managers can pitch their business plan to prospective investors.
C) oversubscribing the offering.
D) none of the above

Question 76

Stockholder voting rights include:

A) voting on the amount of dividends the firm will pay to current stockholders.
B) voting as to whether or not the firm should file for bankruptcy.
C) voting for members on the Board of Directors.
D) voting on whether or not the firm will issue additional debt.
E) all of the above

Question 77

A stock is expected to pay a dividend of $3.00 in one year.To purchase the stock,investors seek a 15% annual return.If the stock is currently trading at $60,what is the implied constant growth rate in dividends for the future?

A) 5%
B) 10%
C) 15%
D) 20%

Question 78

What term refers to the number of shares issued by a firm multiplied by the current price of the shares on the secondary market?

A) Financial leverage
B) Market capitalization
C) Additional paid-in capital
D) Liquidation value

Question 79

Which of the following activities is not one of the three principal lines of business for U.S.-based investment banks?

A) Working capital management
B) Corporate finance
C) Trading
D) Asset management

Question 80

What is the term applied to several investment banks joining together to bring an IPO to market to limit risk exposure?

A) Selling group
B) Underwriting portfolio
C) Investment bank portfolio
D) Underwriting syndicate