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Chapter 08: Basic Stock Valuation
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Page 41
HAS VARIABLES:
False
66. $35.50 per share is the current price for Foster Farms' stock. 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.
$37.86
b.
$38.83
c.
$39.83
d.
$40.85
e.
$41.69
ANSWER:
e
67. Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of
4.75% 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.
$40.17
b.
$41.20
c.
$42.26
Chapter 08: Basic Stock Valuation
d.
$43.34
e.
$44.46
ANSWER:
e
68. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the
coming year?
a.
4.12%
b.
4.34%
c.
4.57%
d.
4.81%
e.
5.05%
POINTS:
1
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69. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming
year?
a.
4.42%
b.
4.66%
c.
4.89%
d.
5.13%
e.
5.39%
POINTS:
1
70. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the
coming year?
a.
6.50%
b.
6.83%
c.
7.17%
d.
7.52%
e.
7.90%
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POINTS:
1
71. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming
year?
a.
7.54%
b.
7.73%
c.
7.93%
d.
8.13%
e.
8.34%
POINTS:
1
72. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming
year?
Chapter 08: Basic Stock Valuation
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Page 45
a.
8.37%
b.
8.59%
c.
8.81%
d.
9.03%
e.
9.27%
POINTS:
1
73. Dyer Furniture 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 1.15, the market risk premium is
5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?
a.
$28.90
b.
$29.62
c.
$30.36
d.
$31.12
e.
$31.90
POINTS:
1
74. The Jameson 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 1.15, the market risk premium is 5.00%, and the risk-free rate is
4.00%. What is Jameson's current stock price, P0?
a.
$18.62
b.
$19.08
c.
$19.56
d.
$20.05
e.
$20.55
POINTS:
1
75. National Advertising 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 1.25, 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?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
POINTS:
1
76. Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend
is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a.
$0.95
b.
$1.05
c.
$1.16
d.
$1.27
e.
$1.40
ANSWER:
b
77. Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 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.
$2.20
b.
$2.44
c.
$2.69
d.
$2.96
e.
$3.25
ANSWER:
b
78. Connolly Co.'s expected year-end dividend is D1 = $1.60, 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 Connolly's expected stock price in 7 years, i.e.,
what is ?
a.
$37.52
b.
$39.40
c.
$41.37
d.
$43.44
e.
$45.61
POINTS:
1
79. Burke Tires 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
ANSWER:
d
Chapter 08: Basic Stock Valuation
POINTS:
1
80. McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate
in earnings and dividends will fall 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
POINTS:
1
81. Orwell Building Supplies' 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
e.
$45.92
POINTS:
1
82. The last dividend paid by Wilden Corporation 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
POINTS:
1
83. The last dividend paid by Coppard Inc. 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
ANSWER:
d
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POINTS:
1
84. Sawchuck Consulting has been profitable for the last 5 years, but it 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 08: Basic Stock Valuation
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POINTS:
1
85. The required return for Williamson Heating's stock is 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%
POINTS:
1
86. Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE). She 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.
Julia 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. Julia 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:
Julia 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 TV. 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%
Chapter 08: Basic Stock Valuation
POINTS:
1
87. Preferred stock is a hybrid⎯a sort of cross between a common stock and a bond⎯in the sense that it pays dividends that
normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
a.
True
b.
False
ANSWER:
False
88. From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock
but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds
are the most risky for the firm, preferred is next, and common is least risky.
a.
True
b.
False
89. Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If
the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
a.
$104.27
b.
$106.95
c.
$109.69
d.
$112.50
e.
$115.38
ANSWER:
e
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90. Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal
(not effective) annual rate of return?
a.
8.03%
b.
8.24%
c.
8.45%
d.
8.67%
e.
8.89%
ANSWER:
e
91. Connor Publishing'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%
Chapter 08: Basic Stock Valuation
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Page 59
e.
7.47%
POINTS:
1
