Use the information for the question(s) below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of
the second year. You expect Von Bora’s stock price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is
10%
43)
Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.
You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid.
The dividend yield that you will receive on your investment is closest to:
43)
A)
4.00%
B)
6.25%
C)
6.50%
D)
5.75%
Use the information for the question(s) below.
Defenestration industries plans to pay a $4.00 dividend this year and you expect that the firm’s earnings are on track to grow
at 5% per year for the foreseeable future. Defenestration’s equity cost of capital is 13%.
44)
Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the
remaining $2 per share to repurchase stock. If Defenestration’s payout rate remains constant, then
Defenestration’s stock price is closest to:
44)
A)
$30.75
B)
$22.25
C)
$50.00
D)
$32.30
45)
When discounting dividends you should use?
45)
A)
the before tax cost of debt.
B)
the after tax weighted average cost of capital.
C)
the weighted average cost of capital.
D)
the equity cost of capital.
46)
Which of the following statements is false?
46)
A)
The dividend each year is the firm’s earnings per share (EPS) multiplied by its dividend
payout rate.
B)
There is a tremendous amount of uncertainty associated with any forecast of a firm’s future
dividends.
C)
During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to
shareholders in the form of dividends.
D)
A common approximation is to assume that in the long run, dividends will grow at a constant
rate.
47)
Which of the following is not a way that a firm can increase its dividend?
47)
A)
By increasing its dividend payout rate
B)
By decreasing its shares outstanding
C)
By increasing its earnings (net income)
D)
By increasing its retention rate
48)
Which of the following statements is false?
48)
A)
The intuition behind the use of the P/E ratio is that when you buy a stock, you are in sense
buying the rights to the firm’s future earnings and differences in the scale of firms’ earnings
are likely to persist.
B)
You should be willing to pay proportionally more for a stock with lower current earnings.
C)
A firm’s P/E ratio is equal to the share price divided by its earnings per share.
D)
The most common valuation multiple is the price–earnings (P/E) ratio.
49)
You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they
will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI’s return on new
investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI’s
dividends is closest to:
49)
A)
4.5%
B)
6.0%
C)
7.5%
D)
3.0%
50)
Which of the following statements is false?
50)
A)
If the profit opportunities from having private information are large, other individuals will
attempt to gain the expertise and devote the resources needed to acquire it.
B)
When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock
suggests that they value the stock differently.
C)
When private information is relegated to the hands of a relatively small number of investors,
these investors may be able to profit by trading on their information.
D)
Since stock markets aggregate the information and view of many different investors, we
expect the stock price to react slowly to new publicly available information as the investors
continue to trade until a consensus is reached as to the new value of the stock.
Use the information for the question(s) below.
You expect CCM Corporation to generate the following free cash flows over the next five years:
Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40
Following year five, you estimate that CCM’s free cash flows will grow at 5% per year and that CCM’s weighted average cost
of capital is 13%.
51)
If CCM has $200 million of debt and 8 million shares of stock outstanding, then the share price for
CCM is closest to:
51)
A)
$12.50
B)
$49.50
C)
$19.35
D)
$24.50
52)
Which of the following statements is false?
52)
A)
The dividend discount model values the stock based on a forecast of the future dividends
paid to shareholders.
B)
The simplest forecast for the firm’s future dividends states that they will grow at a constant
rate, g, forever.
C)
As firms mature, their growth slows to rates more typical of established companies.
D)
We cannot use the general dividend discount model to value the stock of a firm with rapid or
changing growth.
53)
Von Bora Coporation (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:
53)
A)
$25.00
B)
$11.10
C)
$40.00
D)
$15.40
Use the information for the question(s) below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of
the second year. You expect Von Bora’s stock price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is
10%
54)
The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the
stock for two years is closest to:
54)
A)
$21.90
B)
$20.65
C)
$21.95
D)
$23.15
55)
You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.
If Whirlpool stock is currently trading at $87.00 per share, then Whirlpool‘s P/E ratio is closest to:
55)
A)
17.00
B)
14.25
C)
7.00
D)
13.50
56)
Which of the following is not a situation where a trader is able to identify positive NPV trading
opportunities in the securities markets?
56)
A)
An investor who has access to information known only to a few investors.
B)
An investor who has expertise in a highly complicated area for which a company has just
released information.
C)
An investor who gets up really early in the morning so he can be the first to read and act upon
the information contained in that days Wall Street Journal.
D)
An investor who has lower trading costs than other market participants.
57)
Which of the following statements is false?
57)
A)
The sum of the dividend yield and the capital gain rate is called the total return of the stock.
B)
We divide the capital gain by the expected future stock price to calculate the capital gain rate.
C)
Future dividend payments and stock prices are not known with certainty; rather these values
are based on the investor’s expectations at the time the stock is purchased.
D)
The capital gain is the difference between the expected sale price and the purchase price of
the stock.
58)
Which of the following statements is false?
58)
A)
The total amount received in dividends and from selling the stock will depend on the investor
’s investment horizon.
B)
An investor will be willing to pay up to the point at which the current price of a share of stock
equals the present value of the expected future dividends an expected future sale price.
C)
The expected total return of a stock should equal the expected return of other investments
available in the market with equivalent risk.
D)
If the current stock price were greater than P0=
Div1+ P1
1 + rE, it would be a positive NPV
investment, and we would expect investors to rush in and buy it, driving up the stocks price.
Use the information for the question(s) below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of
the second year. You expect Von Bora’s stock price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is
10%
59)
Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.
You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid.
The capital gain rate that you will receive on your investment is closest to:
59)
A)
3.50%
B)
4.00%
C)
3.75%
D)
6.25%
Use the information for the question(s) below.
You expect CCM Corporation to generate the following free cash flows over the next five years:
Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40
Following year five, you estimate that CCM’s free cash flows will grow at 5% per year and that CCM’s weighted average cost
of capital is 13%.
60)
If CCM has $150 million of debt and 12 million shares of stock outstanding, then the share price for
CCM is closest to:
60)
A)
$11.25
B)
$20.50
C)
$49.50
D)
$22.75
61)
Which of the following statements is false?
61)
A)
The law of one price implies that to value any security, we must determine the expected cash
flows an investor will receive from owning it.
B)
The price of a share of stock is equal to the present value of the expected future dividends it
will pay.
C)
If the current stock price were less than P0=
Div1+P1
1 +rE, it would be a negative NPV
investment, and we would expect investors to rush in and sell it, driving down the stocks
price.
D)
The equity cost of capital for a stock is the expected return of other investments available in
the market with equivalent risk to the firm’s shares.
62)
Which of the following statements is false regarding profitable and unprofitable growth?
62)
A)
If the firm retains more earnings, it will be able to pay out less of those earnings, which means
that the firm will have to reduce its dividend.
B)
Cutting the firm’s dividend to increase investment will raise the stock price if, and only if, the
new investments have a positive NPV.
C)
A firm can increase its growth rate by retaining more of its earnings.
D)
If a firm wants to increase its share price, it must cut its dividend and invest more.
63)
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:
63)
A)
2%
B)
4%
C)
8%
D)
6%
64)
Which of the following formulas is incorrect?
64)
A)
P0=
N
n= 1
Divn
(1 +rE)n
B)
P0=
Div1+P1
1 +rE
C)
P0=
Div1
1 +rE
+
Div2
(1 +rE)2+ … +
DivN
(1 +rE)N
D)
rE=
Div1 +P0
P1
65)
Which of the following equations is incorrect?
65)
A)
P0=
V0+ Debt – Cash
Shares Outstanding
B)
Enterprise Value = Market Value of Equity + Debt – Cash
C)
V0=
FCF1
1 +rwacc
+
FCF2
(1 +rwacc)2+ … +
FCFN
(1 +rwacc)N+
VN
(1 +rwacc)N
D)
Free Cash Flow =EBIT × (1 –c) + Depreciation – Capital Expenditures –DNWC
P0=
V0+ Cash – Debt
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
66)
What are some implicit assumptions that are made when valuing a firm using multiples based on comparable
firms?
67)
Monsters Inc. is a utility company that recently paid a common stock dividend of $2.35 per share. Determine
the current price of a share of Monsters’ common stock if its divided growth rate is expected to remain at 7
percent per year indefinitely and its equity cost of capital is 12 percent.
rE=
Div1 +P1
P0
68)
Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four years
(effecting D1, D2, D3, and D4). Beginning in year five, the growth rate is expected to drop to 7 percent per year
and last indefinitely. If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent, then
what is the value of a share of GRE?
69)
What are the implications of the efficient market hypothesis for corporate managers?
70)
What are some common multiples used to value stocks?
Use the information for the question(s) below.
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of
the second year. You expect Von Bora’s stock price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is
10%
71)
Suppose you plan to hold Von Bora stock for only one year. Calculate your total return from holding Von Bora
stock for the first year.
Use the information for the question(s) below.
You expect DM Corporation to generate the following free cash flows over the next five years:
Year 1 2 3 4 5
FCF ($ millions) 75 84 96 111 120
Beginning with year six, you estimate that DM’s free cash flows will grow at 6% per year and that DM‘s weighted average
cost of capital is 15%.
72)
Calculate the enterprise value for DM Corporation.
25
Use the information for the question(s) below.
In a surprise announcement, NASA released details of a major contract with Lockheed–Martin (LMT) that would increase
LMT’s market value by $7.5 billion. It was widely expected by the market that this contract would be awarded to LMT‘s
major competitor Boeing (BA). Assume that Boeing has 800 million shares outstanding and Lockheed Martin has 425 million
shares outstanding. Prior to this announcement, the market felt that the probability of Boeing winning the contract was 90%
and that Lockheed–Martin’s chance was only about 10%.
73)
What do you anticipate will happen to Lockheed–Martin and Boeings’ stock prices are a result of this surprise
announcement?
74)
MJ LTD is expected to grow at various rates over the next five years. The company just paid a $1.00 dividend.
The company expects to grow at 20% for the next two years (effecting D1 and D2), then the company expects to
grow at 10% for three additional years (D3, D4, D5) after which the company expects to grow at a constant rate
of 5% per year indefinitely. If the required rate of return on MJ’s common stock is 12%, then what is a share of
MJ’s stock worth?
Use the information for the question(s) below.
You expect DM Corporation to generate the following free cash flows over the next five years:
Year 1 2 3 4 5
FCF ($ millions) 75 84 96 111 120
Beginning with year six, you estimate that DM’s free cash flows will grow at 6% per year and that DM‘s weighted average
cost of capital is 15%.
75)
If DM has $500 million of debt and 14 million shares of stock outstanding, then what is the price per share for
DM Corporation?
27
Answer Key
Testname: C9
Answer Key
Testname: C9
Answer Key
Testname: C9
30