Managerial Finance Problem Review Set Stock Valuation

1.)
The constant growth DCF model used to evaluate the prices of common
stocks is essentially the same as the model used to find the price of
perpetual preferred stock or any other perpetuity.
a. True
b. False
2.)
If two firms have the same current dividend and the same expected
dividend growth rate, their stocks must sell at the same current price
or else the market will not be in euilibrium.
a. True
b. False
3.)
!tock " has a reuired return of #$% and a price of &'(, and its
dividend is expected to grow at a constant rate of )% per year. !tock *
has a reuired return of #'% and a price of &+$, and its dividend is
expected to grow at a constant rate of ,% per year. -hich of the
following statements is C.//0CT1
a. If the stock market were efficient, these two stocks would have the same
price.
b. The two stocks have the same dividend yield.
c. If the stock market were efficient, these two stocks would have the same
expected return.
d. The two stocks have the same expected capital gains yield.
e. The two stocks have the same expected year2end dividend.
4.)
!tocks " and * have the same price, but !tock " has the higher reuired
rate of return. -hich of the following statements is C.//0CT1
a. If !tock " has a lower dividend yield than !tock *, its expected capital
gains yield must be higher than !tock *3s.
b. !tock * must have a higher dividend yield than !tock ".
c. !tock " must have a higher dividend yield than !tock *.
d. If !tock " has a higher dividend yield than !tock *, its expected
capital gains yield must be lower than !tock *3s.
e. !tock " must have both a higher dividend yield and a higher capital
gains yield than !tock *.
5.)
" stock is expected to pay a year2end dividend of &'.$$, i.e., D
#
4
&'.$$. The dividend is expected to decline at a rate of (% a year
forever 5g 4 2(%6. If the company3s expected and reuired rate of
return is #(%, which of the following statements is C.//0CT1
a. The company3s current stock price is &'$.
b. The company3s dividend yield ( years from now is expected to be #$%.
c. The constant growth model cannot be used because the growth rate is
negative.
d. The company3s expected capital gains yield is (%.
e. The company3s stock price next year is expected to be &,.($.
.)
!tocks 7 and 8 sell at the same price. !tock 7 has a reuired return of
#'% while 89s reuired return is #$%. !tock 73s dividend is expected to
grow at a constant rate of :% a year, while !tock 83s dividend is
expected to grow at a constant rate of +%. If the market is in
euilibrium so that expected returns eual reuired returns, which of
the following statements is C.//0CT1
a. !tock 7 has a higher dividend yield than !tock 8.
b. !tock 8 has a higher dividend yield than !tock 7.
c. .ne year from now, !tock 73s price is expected to be higher than !tock
83s price.
d. !tock 7 has the higher expected year2end dividend.
e. !tock 8 has a higher capital gains yield.
!.)
The expected return on ;ortheast Corporation3s stock is #+%. The stock3s
dividend is expected to grow at a constant rate of <%, and it currently
sells for &($ a share. -hich of the following statements is C.//0CT1
a. The stock3s dividend yield is )%.
b. The stock3s dividend yield is <%.
c. The current dividend per share is &+.$$.
d. The stock price is expected to be &(+ a share one year from now.
e. The stock price is expected to be &() a share one year from now.
".)
!tock " has a beta of #.# and !tock *9s beta is $.,. The market risk
premium is :%, and the risk2free rate is :.=%. *oth stocks have a
constant dividend growth rate of )%. If the market is in euilibrium,
which of the following statements is C.//0CT1
a. !tock " must have a higher stock price than !tock *.
b. !tock " must have a higher dividend yield than !tock *.
c. !tock *3s dividend yield euals its expected dividend growth rate.
d. !tock * must have the higher reuired return.
e. !tock * could have the higher expected return.
#.)
" stock is expected to pay a dividend of &$.)( at the end of the year.
The reuired rate of return is r
s
4 #'.(%, and the expected constant
growth rate is g 4 <.(%. -hat is the current stock price1
a. &#).<'
b. &#<.'<
c. &#<.)(
d. &#,.''
e. &#,.)$
1$.)
" share of common stock has >ust paid a dividend of &'.$$. If the
expected long2run growth rate for this stock is (.$%, and if investors9
reuired rate of return is #$.(%, what is the stock price1
a. &=(.=,
b. &=:.=$
c. &=).'=
d. &=<.#<
e. &=,.#+
11.)
If D
#
4 &#.'(, g 5which is constant6 4 (.(%, and ?
$
4 &++, what is the
stock3s expected total return for the coming year1
a. ).(+%
b. ).)=%
c. ).,=%
d. <.#=%
e. <.=+%
12.)
The @umwalt Company is expected to pay a dividend of &'.'( per share at
the end of the year, and that dividend is expected to grow at a constant
rate of (.$$% per year in the future. The company9s beta is #.#(, the
market risk premium is (.($%, and the risk2free rate is +.$$%. -hat is
the company9s current stock price1
a. &+'.'(
b. &+=.=#
c. &++.=,
d. &+(.($
e. &+:.:+
13.)
Aoode Inc.9s stock has a reuired rate of return of ##.($%, and it sells
for &'(.$$ per share. Aoode9s dividend is expected to grow at a constant
rate of ).$$% per year. -hat was Aoode9s last dividend, D
$
1
a. &$.,(
b. &#.$(
c. &#.#:
d. &#.')
e. &#.+$
14.)
8ou must estimate the intrinsic value of Tsetseko Technologies3 stock.
Tsetseko9s end2of2year free cash flow 5FCF6 is expected to be &#).($
million, and it is expected to grow at a constant rate of ).$$% a year
thereafter. The company3s -"CC is #$.$$%. Tsetseko has &#'(.$$ million
of long2term debt plus preferred stock, and there are #(.$$ million
shares of common stock outstanding. -hat is Tsetseko9s estimated
intrinsic value per share of common stock1
a. &'<.#:
b. &',.==
c. &=$.(:
d. &=#.)<
e. &==.$(
15.)
Carter9s preferred stock pays a dividend of &#.$$ per uarter. If the
price of the stock is &($.$$, what is its nominal 5not effective6 annual
rate of return1
a. ).'=%
b. ).+#%
c. ).:#%
d. ).<$%
e. <.$$%
1.)
The Bpton Company9s last dividend was &#.)(. Its dividend growth rate
is expected to be constant at #<.$$% for ' years, after which dividends
are expected to grow at a rate of :.$$% forever. Bpton9s reuired
return 5r
s
6 is #'.$$%. -hat is Bpton9s current stock price1
a. &=).#(
b. &=<.#$
c. &=,.$:
d. &+$.$=
e. &+#.$=
Solution%
1.) a
2.) b
3.) b
4.) a
5.) e
.) c
!.) &
".) b
#.) c
1$.) &
11.) e
12.) a
13.) b
14.) c
15.) e
1.) b