Chapter 9: Stocks M/C Problems Page 19
c. 8.45%
d. 8.67%
e. 8.89%
74. Rebello’s preferred stock pays a dividend of $1.00 per quarter, and it
sells for $55.00 per share. What is its effective annual (not nominal)
rate of return?
a. 6.62%
b. 6.82%
c. 7.03%
d. 7.25%
e. 7.47%
75. Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect
the company’s dividend to grow by 30% this year, by 10% in Year 2, and
at a constant rate of 5% in Year 3 and thereafter. The required return
on this low-risk stock is 9.00%. What is the best estimate of the
stock’s current market value?
a. $41.59
b. $42.65
c. $43.75
d. $44.87
e. $45.99
76. Church Inc. is presently enjoying relatively high growth because of a
surge in the demand for its new product. Management expects earnings
and dividends to grow at a rate of 25% for the next 4 years, after
which competition will probably reduce the growth rate in earnings and
dividends to zero, i.e., g = 0. The company’s last dividend, D0, was
$1.25, its beta is 1.20, the market risk premium is 5.50%, and the
risk-free rate is 3.00%. What is the current price of the common
stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
77. The Ramirez Company’s last dividend was $1.75. Its dividend growth
rate is expected to be constant at 25% for 2 years, after which
dividends are expected to grow at a rate of 6% forever. Its required
return (rs) is 12%. What is the best estimate of the current stock
price?
a. $41.58
b. $42.64
c. $43.71
d. $44.80
Page 20 M/C Problems Chapter 9: Stocks
e. $45.92
78. Ackert Company’s last dividend was $1.55. The dividend growth rate is
expected to be constant at 1.5% for 2 years, after which dividends are
expected to grow at a rate of 8.0% forever. The firm’s required return
(rs) is 12.0%. What is the best estimate of the current stock price?
a. $37.05
b. $38.16
c. $39.30
d. $40.48
e. $41.70
79. Huang Company’s last dividend was $1.25. The dividend growth rate is
expected to be constant at 15% for 3 years, after which dividends are
expected to grow at a rate of 6% forever. If the firm’s required
return (rs) is 11%, what is its current stock price?
a. $30.57
b. $31.52
c. $32.49
d. $33.50
e. $34.50
80. Agarwal Technologies was founded 10 years ago. It has been profitable
for the last 5 years, but it has needed all of its earnings to support
growth and thus has never paid a dividend. Management has indicated
that it plans to pay a $0.25 dividend 3 years from today, then to
increase it at a relatively rapid rate for 2 years, and then to
increase it at a constant rate of 8.00% thereafter. Management’s
forecast of the future dividend stream, along with the forecasted
growth rates, is shown below. Assuming a required return of 11.00%,
what is your estimate of the stock’s current value?
Year 0 1 2 3 4 5 6
Growth rate NA NA NA NA 50.00% 25.00% 8.00%
Dividends $0.000 $0.000 $0.000 $0.250 $0.375 $0.469 $0.506
a. $ 9.94
b. $10.19
c. $10.45
d. $10.72
e. $10.99
Chapter 9: Stocks M/C Problems Page 21
81. Wall Inc. forecasts that it will have the free cash flows (in millions)
shown below. If the weighted average cost of capital is 14% and the
free cash flows are expected to continue growing at the same rate after
Year 3 as from Year 2 to Year 3, what is the firm’s total corporate
value, in millions?
Year 1 2 3
Free cash flow –$20.00 $48.00 $54.00
a. $2,650.00
b. $2,789.47
c. $2,928.95
d. $3,075.39
e. $3,229.16
82. Savickas Petroleum’s stock has a required return of 12%, and the stock
sells for $40 per share. The firm just paid a dividend of $1.00, and
the dividend is expected to grow by 30% per year for the next 4 years,
so D4 = $1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected
to grow at a constant rate of X% per year forever. What is the stock’s
expected constant growth rate after t = 4, i.e., what is X?
a. 5.17%
b. 5.44%
c. 5.72%
d. 6.02%
e. 6.34%
Page 22 M/C Problems Chapter 9: Stocks
83. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE),
asked you to help her estimate the intrinsic value of the company’s
stock. FCE just paid a dividend of $1.00, and the stock now sells for
$15.00 per share. Sally asked a number of security analysts what they
believe FCE’s future dividends will be, based on their analysis of the
company. The consensus is that the dividend will be increased by 10%
during Years 1 to 3, and it will be increased at a rate of 5% per year
in Year 4 and thereafter. Sally asked you to use that information to
estimate the required rate of return on the stock, rs, and she provided
you with the following template for use in the analysis.
Sally told you that the growth rates in the template were just put in
as a trial, and that you must replace them with the analysts’
forecasted rates to get the correct forecasted dividends and then the
estimated HV. She also notes that the estimated value for rs, at the
top of the template, is also just a guess, and you must replace it with
a value that will cause the Calculated Price shown at the bottom to
equal the Actual Market Price. She suggests that, after you have put in
the correct dividends, you can manually calculate the price, using a
series of guesses as to the Estimated rs. The value of rs that causes
the calculated price to equal the actual price is the correct one. She
notes, though, that this trial-and-error process would be quite
tedious, and that the correct rs could be found much faster with a
simple Excel model, especially if you use Goal Seek. What is the value
of rs?
a. 11.84%
b. 12.21%
c. 12.58%
d. 12.97%
e. 13.36%
Estimated rs = 10.00% (must be changed to force Calculated Price to equal the Actual Market Price)
$15.00
Year 0 1 2 3 4 5
Dividend growth rate (insert correct values) 10% 10% 10% 5% 5%
Calculated dividends (D0 has been paid) $1.00 ? ? ? ? ?
HV3 = P3 = D4/(rs − g4). Find using Estimated rs. ?
Total CFs ? ? ?
PVs of CFs when discounted at Estimated rs? ? ?
Calculated Price = P0 = Sum of PVs = $0.00 A positive number will be here when dividends are estimated.
The Calculated Price will equal the Actual Market Price once the
correct rs has been found.
Normal growth
Rapid growth
Actual Market Price, P0:
Chapter 9: Stocks Answers Page 23
CHAPTER 9
ANSWERS AND SOLUTIONS
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