P0 = + + … + + ×
35) NoGrowth Industries presently pays an annual dividend of $1.50 per share and it is expected that these
dividend payments will continue indefinitely. If NoGrowth’s equity cost of capital is 12%, then the value of
a share of NoGrowth’s stock is closest to:
A) $10.00
B) $15.00
C) $14.00
D) $12.50
36) Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect VBC’s
dividend to grow by 5% per year forever and VBC’s equity cost of capital is 13%, then the value of a share of
VBS stock is closest to:
A) $25.00
B) $40.00
C) $15.40
D) $11.10
37) Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%. Luther Industries’
dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther’s dividends are
closest to:
A) 7.5%
B) 5.5%
C) 16.5%
D) 12%
38) The Sisyphean Company’s common stock is currently trading for $25.00 per share. The stock is expected to
pay a $2.50 dividend at the end of the year and the Sisyphean Company’s equity cost of capital is 14%. If the
dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean
Company’s earnings is closest to:
A) 8%
B) 6%
C) 4%
D) 2%
39) You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out
$1.50 of these earnings to shareholders in the form of a dividend. KTI’s return on new investments is 15%
and their equity cost of capital is 12%. The expected growth rate for KTI’s dividends is closest to:
A) 6.0%
B) 7.5%
C) 4.5%
D) 3.0%
40) You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out
$1.50 of these earnings to shareholders in the form of a dividend. KTI’s return on new investments is 15%
and their equity cost of capital is 12%. The value of a share of KTI’s stock is closest to:
A) $39.25
B) $20.00
C) $33.35
D) $12.50
41) JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the
extra funds to expand its operations. Prior to this announcement, JRN’s dividends were expected to grow at
4% per year and JRN’s stock was trading at $25.00 per share. With the new expansion, JRN’s dividends are
expected to grow at 8% per year indefinitely. Assuming that JRN’s risk is unchanged by the expansion, the
value of a share of JRN after the announcement is closest to:
A) $25.00
B) $15.00
C) $31.25
D) $27.50
42) You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to
retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining
50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings
will be invested in projects with an expected return of 20% per year. If Bean’s equity cost of capital is 12%,
then the price of a share of Bean’s stock is closest to:
A) $17.00
B) $10.75
C) $27.75
D) $43.50
43) Avril Synchronistics will pay a dividend of $1.30 per share this year. It is expected that this dividend will
grow by 5% each year in the future. What will be the current value of a single share of Avril’s stock if the
firm’s equity cost of capital is 14%?
A) $9.23
B) $9.28
C) $14.44
D) $15.16
44) Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will
grow by 3% per year each year in the future. What will be the current value of a single share of Spacefood’s
stock if the firm’s equity cost of capital is 10%?
A) $24.00
B) $23.97
C) $30.22
D) $34.29
45) Gremlin Industries will pay a dividend of $1.80 per share this year. It is expected that this dividend will
grow by 4% per year each year in the future. The current price of Gremlin’s stock is $22.40 per share. What is
Gremlin’s equity cost of capital?
A) 11%
B) 12%
C) 14%
D) 16%
46) A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year. The
company’s cost of equity is 8%. What is the expected annual growth rate of the company’s dividends?
A) 2%
B) 4%
C) 8%
D) 11%
47) Which of the following is NOT a method by which a company can increase its dividend payments?
A) It can issue more shares.
B) It can increase its earnings.
C) It can decrease the number of shares outstanding.
D) It can increase its dividend payout rate.
48) Jumbo Transport, an air–cargo company, expects to have earnings per share of $2.50 in the coming year. It
decides to retain 20% of these earnings in order to lease new aircraft. The return on this investment will be
25%. If its equity cost of capital is 12%, what is the expected share price of Jumbo Transport?
A) $16.67
B) $19.23
C) $24.75
D) $28.57
49) Sunnyfax Publishing pays out all its earnings and has a share price of $38. In order to expand, Sunnyfax
Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the
funds are reinvested, they are expected to grow at a rate of 12%. If the reinvestment does not affect
Sunnyfax’s equity cost of capital, what is the expected share price as a consequence of this decision?
A) $33.33
B) $40.00
C) $50.00
D) $60.00
50) Kirkevue Industries pays out all its earnings as dividends and has a share price of $24. In order to expand,
Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained
funds. What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of
capital unchanged?
A) 0.83%
B) 15.33%
C) 18.23%
D) 17.97%
51) Sinclair
P h a r m a c
e u t i c a l
s, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a
bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair
P h a r m a c
e u t i c a l
s will experience extremely high growth over the next three years and will reinvest all of its
earnings in expanding the company over this time. Earnings were $1.20 per share before the development
of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is
expected growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will
pay dividends that are 75% of its earnings. If its equity cost of capital is 10%, what is the value of a share of
Sinclair
P h a r m a c
e u t i c a l
s t o d a y ?
A) $33.33
B) $38.96
C) $48.30
D) $52.00
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
52) What is a major assumption about growth rate in the dividend–discount model?
53) What is the relationship between the growth rate and the cost of equity implied in the dividend–discount
model?
54) Assuming everything else remains unchanged, how does a firm’s decision to increase its dividend–payout
ratio affect its growth rate?
55) Can the dividend–discount model handle negative growth rates?
56) How can the dividend–discount model handle changing growth rates?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
57) Forecasting dividends requires forecasting the firm’s future earnings.
58) Stocks that do not pay a dividend must have a value of $0.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
59) Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $5.6 million.
Sultan pays out 60% of its earnings in total 40% paid out as dividends and 20% used to repurchase shares. If
Sultan’s earnings are expected to grow by 7% per year, these payout rates do not change, and Sultan’s equity
cost of capital is 9%, what is Sultan’s share price?
A) $22.40
B) $56.00
C) $93.33
D) $140.00
60) Which of the following models can be used to value a firm without explicitly forecasting that firm’s
dividends, share repurchases, or its use of debt?
I. Dividend–discount model
II. Total payout model
III. Discounted free cash flow model
A) I only
B) II only
C) III only
D) II and III
61) Valence Electronics has 217 million shares outstanding. It expects earnings at the end of the year of $760
million. Valence pays out 40% of its earnings in total 15% paid out as dividends and 25% used to repurchase
shares. If Valence’s earnings are expected to grow by 6% per year, these payout rates do not change, and
Valence’s equity cost of capital is 8%, what is Valence’s share price?
A) $10.51
B) $24.40
C) $56.60
D) $70.05
62) Chittenden Enterprises has 632 million shares outstanding. It expects earnings at the end of the year to be
$940 million. The firm’s equity cost of capital is 10%. Chittenden pays out 30% of its earnings in total: 20%
paid out as dividends and 10% used to repurchase shares. If Chittenden’s earnings are expected to grow at a
constant 4% per year, what is Chittenden’s share price?
A) $4.96
B) $3.36
C) $7.44
D) $14.88
63) Aaron Inc. has 316 million shares outstanding. It expects earnings at the end of the year to be $602 million.
The firm’s equity cost of capital is 11.5%. Aaron pays out 50% of its earnings in total: 30% paid out as
dividends and 20% used to repurchase shares. If Aaron’s earnings are expected to grow at a constant 6% per
year, what is Aaron’s share price?
A) $8.66
B) $17.32
C) $25.98
D) $34.64
