Question 1

Suppose that a firm's recent earnings per share and dividend per share are $2.50 and $1.00, respectively. Both are expected to grow at 5 percent. However, the firm's current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years. Compute a value for this stock. Assume a 10 percent required rate.

Accepted Answer

A)  $36.19 
B)  $38.86 
C)  $40.31 
D)  $42.00

Question 2

Campbell Soup Co. paid a $1.55 dividend per share in 2012, which grew to $1.95 in 2017. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required return is 10.5 percent?

Accepted Answer

A)  $35.20 
B)  $34.16 
C)  $33.48 
D)  $32.17

Question 3

GEN has 1 million shares outstanding and a P/E ratio of 12. Its earnings per share is $2.00. What is GEN's market capitalization?

Accepted Answer

A)  $24,000,000 
B)  $12,000,000 
C)  $2,000,000 
D)  $96,000,000

Question 4

Best Buy Co. (BBY) paid a $0.27 dividend per share in 2013, which grew to $0.49 in 2017. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required rate of return is 17.23 percent?

Accepted Answer

A)  $2.84 
B)  $42.24 
C)  $49.03 
D)  $50.78

Question 5

Annual dividends of Walmart Stores (WMT) grew from $0.23 in 2000 to $0.83 in 2007. What was the annual growth rate?

Accepted Answer

A)  2.61 percent 
B)  20.12 percent 
C)  37.29 percent 
D)  260.87 percent

Question 6

A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

Accepted Answer

A)  $65.40 
B)  $66.67 
C)  $65.57 
D)  $79.14

Question 7

If Target Corp. (TGT) recently earned a profit of $6.07 earnings per share and has a P/E ratio of 16.5. The dividend has been growing at a 10 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 18 in five years?

Accepted Answer

A)  $100.16, $109.26 respectively 
B)  $161.30, $175.96 respectively 
C)  $259.78, $283.39 respectively 
D)  $261.30, $275.96 respectively

Question 8

Dividend yield is defined as

Accepted Answer

A)  the last four quarters of dividend income expressed as a percentage of the par value of the stock. 
B)  the last four quarters of dividend income expressed as a percentage of the current stock price. 
C)  the last dividend paid expressed as a percentage of the current stock price. 
D)  the next dividend to be paid expressed as a percentage of the current stock price.

Question 9

Consider a firm that had been priced using a 12 percent growth rate and a 16 percent required return. The firm recently paid a $5.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate. How much should the stock price change (in dollars and percentage)?

Accepted Answer

A)  $21.50; 13.72 percent 
B)  $21.50; 16.14 percent 
C)  $20.71; 14.79 percent 
D)  $20.71; 19.93 percent

Question 10

Ultra Petroleum (UPL) has earnings per share of $1.75 and P/E of 42.56. What is the stock price?

Accepted Answer

A)  $74.48 
B)  $76.68 
C)  $85.68 
D)  $112.98

Question 11

Investors buy stock at the

Accepted Answer

A)  dealer price. 
B)  bid price. 
C)  quoted ask price. 
D)  broker price.

Question 12

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12 percent return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7 percent versus 8 percent?

Accepted Answer

A)  31.29 percent 
B)  19.82 percent 
C)  21.60 percent 
D)  26.17 percent

Question 13

A firm does not pay any dividends at this point in time. Which valuation method should be used on this stock?

Accepted Answer

A)  Residual Claimant Model 
B)  Variable Growth Model 
C)  P/E Ratio Model 
D)  Capital Gain Model

Question 14

All of the following are stock market indices EXCEPT

Accepted Answer

A)  Standard & Poor's 500 Index. 
B)  Dow Jones Industrial Average. 
C)  Nasdaq Composite Index. 
D)  Mercantile 1000.

Question 15

If Walmart (WMT) recently earned a profit of $5.10 per share and has a P/E ratio of 16.25. The dividend has been growing at a 6 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 12 in five years?

Accepted Answer

A)  $41.44, $30.60 respectively 
B)  $82.88, $61.20 respectively 
C)  $110.91, $81.90 respectively 
D)  $414.38, $306.00 respectively

Question 16

A firm's stock is selling at $75.00 per share. Its growth rate is 10 percent and investors demand 17 percent on this stock. What is the firm's expected dividend?

Accepted Answer

A)  $4.75 
B)  $5.95 
C)  $6.25 
D)  $5.25

Question 17

If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 7 percent, what's the value of the stock?

Accepted Answer

A)  $0.21 
B)  $0.43 
C)  $21.00 
D)  $42.86

Question 18

Target Corp. (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in five years?

Accepted Answer

A)  $118.85, $158.01 respectively 
B)  $137.19, $182.39 respectively 
C)  $173.87, $231.15 respectively 
D)  $308.81, $410.55 respectively

Question 19

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12 percent return on this stock. What is the difference in price if Coca-Cola is expected to grow at 6 percent versus 8 percent?

Accepted Answer

A)  $18 
B)  $48 
C)  $28 
D)  $38

Question 20

A firm is expected to pay a $2.00 dividend per share. The stock is selling in the market place for $50.00 per share. If investors are demanding 10 percent on this stock, what is this stock's growth rate?

Accepted Answer

A)  4.73 percent 
B)  5.92 percent 
C)  6.00 percent 
D)  7.29 percent

Exam 8: Valuing Stocks