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44) Generally speaking, as a firm progresses through the industry life cycle, you would expect
the PVGO to ________ as a percentage of share price.
A) increase
B) decrease
C) stay the same
D) No typical pattern can be expected.
45) Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to
compute the market capitalization rate on the stock and use the constant-growth DDM to
determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using
the constant-growth DDM and the CAPM, the beta of the stock is ________.
A) 1.4
B) 0.9
C) 0.8
D) 0.5
46) Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The
risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts
expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of
Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on
Westsyde Tool Company's stock is ________.
A) 8%
B) 10.8%
C) 15.6%
D) 16.8%
47) Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-
free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect
the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde
Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of
Westsyde Tool Company stock today is ________.
A) $24.29
B) $27.39
C) $31.13
D) $34.52
48) Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd
Mountain Development Corporation has a beta of 0.75. Using the CAPM, the return you should
require on the stock is ________.
A) 7.25%
B) 10.25%
C) 14.75%
D) 21%
49) Todd Mountain Development Corporation is expected to pay a dividend of $3 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd
Mountain Development Corporation has a beta of 0.75. Using the constant-growth DDM, the
intrinsic value of the stock is ________.
A) $4
B) $17.65
C) $37.50
D) $50
50) Generally speaking, the higher a firm's ROA, the ________ the dividend payout ratio and the
________ the firm's growth rate of earnings.
A) higher; lower
B) higher; higher
C) lower; lower
D) lower; higher
51) Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are
expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected
return on the market portfolio is 13%. The stock of Interior Airline has a beta of 1.4. Using the
constant-growth DDM, the intrinsic value of the stock is ________.
A) $45.45
B) $22.73
C) $27.78
D) $41.67
52) Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year.
Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%,
and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining
Corporation has a beta of 0.5. Using the CAPM, the return you should require on the stock is
________.
A) 2%
B) 5%
C) 8%
D) 9%
53) Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year.
Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%,
and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining
Corporation has a beta of 0.5. Using the constant-growth DDM, the intrinsic value of the stock is
________.
A) $50
B) $100
C) $150
D) $200
54) Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in
year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the
rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage
DDM, the stock should be worth ________ today.
A) $63.80
B) $65.13
C) $67.95
D) $85.60
55) Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles.
Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2,
and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2%
per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the
stock should be worth ________ today.
A) $13.07
B) $13.58
C) $18.25
D) $18.78
56) A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to
$4.40, and its share price increased from $80 to $100. Given this information, it follows that
________.
A) the stock experienced a drop in its P/E ratio
B) the company had a decrease in its dividend payout ratio
C) both earnings and share price increased by 20%
D) the required rate of return increased
57) Assuming all other factors remain unchanged, ________ would increase a firm's price-
earnings ratio.
A) an increase in the dividend payout ratio
B) a reduction in investor risk aversion
C) an expected increase in the level of inflation
D) an increase in the yield on Treasury bills
58) A company with an expected earnings growth rate which is greater than that of the typical
company in the same industry most likely has ________.
A) a dividend yield which is greater than that of the typical company
B) a dividend yield which is less than that of the typical company
C) less risk than the typical company
D) less sensitivity to market trends than the typical company
59) Everything else equal, which variable is negatively related to the intrinsic value of a
company?
A) D1
B) D0
C) g
D) k
60) Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out
60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a
13% return on equity in the future, and if you require a 15% return on the stock, the value of the
stock is ________.
A) $26.67
B) $35.19
C) $42.94
D) $59.89
61) A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio?
A) 12
B) 8.33
C) 10.25
D) 18.55
62) A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of
15% and an ROE of 18%. What is the stock's P/E ratio?
A) 12.82
B) 7.69
C) 8.33
D) 9.46
63) A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and
the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per
share, what is the value of the stock?
A) $17.78
B) $20
C) $40
D) none of these options
64) Transportation stocks currently provide an expected rate of return of 15%. TTT, a large
transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at
$60 per share, what must be the market's expectation of the constant-growth rate of TTT
dividends?
A) 5%
B) 10%
C) 20%
D) none of these options
65) A stock is priced at $45 per share. The stock has earnings per share of $3 and a market
capitalization rate of 14%. What is the stock's PVGO?
A) $23.57
B) $15
C) $19.78
D) $21.34
66) A firm increases its dividend plowback ratio. All else equal, you know that ________.
A) earnings growth will increase and the stock's P/E will increase
B) earnings growth will decrease and the stock's P/E will increase
C) earnings growth will increase and the stock's P/E will decrease
D) earnings growth will increase and the stock's P/E may or may not increase
67) A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the
firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%.
What is the firm's PEG ratio?
A) 1.5
B) 1.25
C) 1.1
D) 1
68) ART has come out with a new and improved product. As a result, the firm projects an ROE
of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
Investors expect a 12% rate of return on the stock.
At what price would you expect ART to sell?
A) $25
B) $34.29
C) $42.86
D) $45.67
