Chapter 09: Stocks and Their Valuation
9A Stock Market Equilibrium
Multiple Choice
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Market equilibrium
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46. Which of the following statements is CORRECT?
a.
If a company has two classes of common stock, Class A and Class B, 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 return.
less than the required return (even if the growth rate is negative).
Multiple Choice
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Common stock concepts
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47. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is
CORRECT?
a.
If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the
higher expected growth rate.
b.
If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains
yield than Stock X.
c.
If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then
Chapter 09: Stocks and Their Valuation
Stock Y must sell for a higher price.
d.
The stocks must sell for the same price.
e.
Stock Y must have a higher dividend yield than Stock X.
a
MODERATE
Comprehensive
Multiple Choice
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48. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the
expected constant growth rate is g = 8.2%. What is the stock’s current price?
a.
b.
c.
d.
e.
c
b.
c.
d.
e.
EASY
9-5 Constant Growth Stocks
Multiple Choice
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Constant growth valuation
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Chapter 09: Stocks and Their Valuation
49. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 14.1%, and the constant growth rate is g
= 4.0%. What is the current stock price?
a.
b.
c.
d.
e.
e
b.
c.
d.
e.
EASY
50. A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%,
and if investors’ required rate of return is 14.2%, what is the stock price?
a.
b.
c.
d.
e.
b.
Chapter 09: Stocks and Their Valuation
c.
d.
e.
EASY
51. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $22.00, what is the stock’s expected dividend yield for the
coming year?
a.
5.40%
b.
6.25%
c.
5.68%
d.
6.08%
e.
4.26%
c
b.
c.
d.
e.
EASY
52. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $54, what is the stock’s expected dividend yield for the coming
year?
Chapter 09: Stocks and Their Valuation
a.
4.23%
b.
3.45%
c.
3.75%
d.
4.31%
e.
5.05%
b.
c.
d.
e.
EASY
53. If D1 = $1.50, g (which is constant) = 2.1%, and P0 = $56, what is the stock’s expected capital gains yield for the
coming year?
a.
2.50%
b.
2.39%
c.
2.08%
d.
2.10%
e.
1.66%
b.
c.
d.
e.
Chapter 09: Stocks and Their Valuation
EASY
54. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $40, what is the stock’s expected total return for the coming
year?
a.
8.80%
b.
10.09%
c.
6.47%
d.
10.35%
e.
8.63%
e
b.
c.
d.
e.
EASY
55. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $40.00, what is the stock’s expected total return for the coming
year?
a.
6.42%
b.
8.13%
Chapter 09: Stocks and Their Valuation
c.
9.92%
d.
7.64%
e.
7.48%
b.
c.
d.
e.
EASY
56. Gray Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock
sells for $27.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate,
g, forever. What is the equilibrium expected growth rate?
a.
6.01%
b.
5.54%
c.
6.07%
d.
6.91%
e.
5.95%
e
b.
c.
d.
e.
Chapter 09: Stocks and Their Valuation
EASY
57. Reddick Enterprises’ stock currently sells for $24.50 per share. The dividend is projected to increase at a constant rate
of 5.50% per year. The required rate of return on the stock, rS, is 9.00%. What is the stock’s expected price 3 years from
today?
a.
b.
c.
d.
e.
c
b.
c.
d.
e.
EASY
58. Whited Inc.’s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of
5.25% 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.
b.
Chapter 09: Stocks and Their Valuation
c.
d.
e.
a
b.
c.
d.
e.
EASY
59. Mooradian Corporation’s free cash flow during the just-ended year (t = 0) was $250 million, and its FCF is expected
to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm’s total
corporate value, in millions?
a.
b.
c.
d.
e.
a
b.
c.
e.
EASY
Chapter 09: Stocks and Their Valuation
60. Suppose Boyson Corporation’s projected free cash flow for next year is FCF1 = $100,000, and FCF is expected to
grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the firm’s total
corporate value?
a.
$1,560,000
b.
$1,900,000
c.
$2,000,000
d.
$1,980,000
e.
$1,920,000
c
b.
c.
d.
e.
EASY
61. Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share. If the
required return on this preferred stock is 6.5%, at what price should the stock sell?
a.
b.
c.
d.
Chapter 09: Stocks and Their Valuation
e.
a
b.
c.
d.
e.
EASY
9-8 Preferred Stock
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
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Preferred stock valuation
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DATE MODIFIED:
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62. The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.70, the market risk premium is
5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?
a.
b.
c.
d.
e.
c
b.
c.
d.
e.
MODERATE
9-5 Constant Growth Stocks
QUESTION TYPE:
Multiple Choice
Chapter 09: Stocks and Their Valuation
63. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate
of 5.50% per year in the future. The company’s beta is 1.90, the market risk premium is 5.00%, and the risk-free rate is
4.00%. What is the company’s current stock price, P0?
a.
b.
c.
d.
e.
b.
c.
d.
e.
MODERATE
9-5 Constant Growth Stocks
Multiple Choice
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Constant growth valuation: CAPM
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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 1.70, 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?
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Constant growth valuation: CAPM
Bloom’s: Analysis
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6/23/2015 3:25 PM
Chapter 09: Stocks and Their Valuation
a.
b.
c.
d.
e.
b.
c.
d.
e.
MODERATE
65. Goode Inc.’s stock has a required rate of return of 11.50%, and it sells for $29.00 per share. Goode’s dividend is
expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a.
$0.95
b.
$1.38
c.
$1.37
d.
$1.22
e.
$1.06
Chapter 09: Stocks and Their Valuation
b.
c.
d.
e.
MODERATE
66. Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $87.50 per share. The dividend is expected
to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
a.
$3.72
b.
$2.79
c.
$4.65
d.
$3.16
e.
$3.90
a
b.
c.
d.
e.
MODERATE
Chapter 09: Stocks and Their Valuation
67. Sorenson Corp.’s expected year-end dividend is D1 = $4.00, its required return is rS = 11.00%, its dividend yield is
6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years, i.e.,
what is ?
a.
b.
c.
d.
e.
e
b.
c.
d.
MODERATE
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 $85.00 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.
b.
c.
d.
e.
Chapter 09: Stocks and Their Valuation
69. Misra Inc. forecasts a free cash flow of $55 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant
rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, what is
the horizon, or continuing, value in millions at t = 3?
a.
b.
c.
d.
e.
a
b.
c.
d.
e.
MODERATE
b.
c.
d.
e.
MODERATE
Chapter 09: Stocks and Their Valuation
70. You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cash flow (FCF1) is expected
to be $24.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company’s WACC is
10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of
common stock outstanding. What is the firm’s estimated intrinsic value per share of common stock?
a.
b.
c.
d.
e.
b.
c.
d.
e.
MODERATE
71. You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation’s