Chapter 09: Stocks and Their Valuation
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45. For a stock to be in equilibrium—that is, for there to be no long-term pressure for its price to change—the
a. expected future return must be less than the most recent past realized return.
b. past realized return must be equal to the expected return during the same period.
c. required return must equal the realized return in all periods.
d. expected return must be equal to both the required future return and the past realized return.
e. expected future return must be equal to the required return.
46. Which of the following statements is CORRECT?
a. If a company has two classes of common stock, Class A and Class B, then the stocks may pay different dividends,
but under all state charters the two classes must have the same voting rights.
b. The preemptive right gives stockholders the right to approve or disapprove of a merger between their company
and some other company.
c. The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase
(on a pro rata basis) new issues of the firm’s common stock.
d. The stock valuation model, P0 = D1/(rs – g), cannot be used for firms that have negative growth rates.
e. The stock valuation model, P0 = D1/(rs – g), can be used only for firms whose growth rates exceed their required
returns.
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c. $24.37
d. $23.50
e. $16.47
51. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $30.00, then what is the stock’s expected dividend yield for the
coming year?
a. 4.13%
b. 3.17%
c. 4.17%
d. 3.25%
e. 3.38%
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c. $58.71
d. $68.69
e. $61.65
58. Whited Inc.’s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of
3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock’s expected price 5 years from
now?
a. $41.87
b. $52.33
c. $46.89
d. $40.61
e. $36.42
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59. Mooradian Corporation’s free cash flow during the just-ended year (t = 0) was $160 million, and its FCF is expected
to grow at a constant rate of 5.0% in the future. Assume the firm has zero non-operating assets. If the weighted average
cost of capital is 12.5%, what is the firm’s total corporate value, in millions?
a. $2,240
b. $2,374
c. $2,710
d. $2,016
e. $2,778
60. Suppose Boyson Corporation’s projected free cash flow for next year is FCF1 = $250,000, and FCF is expected to
grow at a constant rate of 6.5%. Assume the firm has zero non-operating assets. If the company’s weighted average cost
of capital is 11.5%, then what is the firm’s total corporate value?
a. $3,850,000
b. $4,000,000
c. $5,000,000
d. $5,050,000
e. $4,200,000
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64. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a
constant rate of 6.50% per year in the future. The company’s beta is 0.75, the required return on the market is 10.50%, and
the risk-free rate is 4.50%. What is the company’s current stock price? Do not round intermediate calculations.
a. $27.80
b. $28.76
c. $31.63
d. $31.95
e. $33.23
65. Goode Inc.’s stock has a required rate of return of 11.50%, and it sells for $33.00 per share. Goode’s dividend is
expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a. $1.64
b. $1.50
c. $1.29
d. $1.39
e. $1.42
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68. Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the
next few years. However, the FCF is expected to be $25.00 million in Year 5, and the FCF growth rate is expected to be a
constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value
(in millions) at t = 5?
a. $387
b. $421
c. $562
d. $484
e. $402
