38. Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm’s ROE is
15%, and its earnings retention ratio is 40%. If the firm’s market capitalization rate is 10%, what is
the present value of its growth opportunities?
39. Annie’s Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm’s
ROE is 18%, and its earnings retention ratio is 60%. If the firm’s market capitalization rate is 12%,
what is the value of the firm excluding any growth opportunities?
40. Flanders, Inc., has expected earnings of $4 per share for next year. The firm’s ROE is 8%,
and its earnings retention ratio is 40%. If the firm’s market capitalization rate is 15%, what is the
present value of its growth opportunities?
41. Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you
expect to have a higher P/E ratio?
42. Firms with higher expected growth rates tend to have P/E ratios that are ___________ the
P/E ratios of firms with lower expected growth rates.
43. Value stocks are more likely to have a PEG ratio _____.
44. Generally speaking, as a firm progresses through the industry life cycle, you would expect
the PVGO to ________ as a percentage of share price.
45. Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to
compute the market capitalization rate on the stock and use the constant-growth DDM to
determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using
the constant-growth DDM and the CAPM, the beta of the stock is _________.
46. Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The
risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts
expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of
Westsyde Tool Company’s stock is 1.2. Using the CAPM, an appropriate required return on
Westsyde Tool Company’s stock is _________.
47. Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts
expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of
Westsyde Tool Company’s stock is 1.2. Using a one-period valuation model, the intrinsic value of
Westsyde Tool Company stock today is _________.
48. Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain
Development Corporation has a beta of .75. Using the CAPM, the return you should require on the
stock is _________.
49. Todd Mountain Development Corporation is expected to pay a dividend of $3 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain
Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of
the stock is _________.
50. Generally speaking, the higher a firm’s ROA, the _________ the dividend payout ratio and
the _________ the firm’s growth rate of earnings.
51. Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are
expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected
return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the
constant-growth DDM, the intrinsic value of the stock is _________.
52. Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year.
Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%,
and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining
Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is
_________.
53. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year.
Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%,
and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining
Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is
_________.
54. Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in
year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the
rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage
DDM, the stock should be worth __________ today.
55. Ace Frisbee Corporation produces a good that is very mature in the firm’s product life
cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2
of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of
2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the
stock should be worth __________ today.
56. A firm’s earnings per share increased from $10 to $12, its dividends increased from $4 to
$4.40, and its share price increased from $80 to $100. Given this information, it follows that
_________.
57. Assuming all other factors remain unchanged, __________ would increase a firm’s price–
earnings ratio.
58. A company with an expected earnings growth rate which is greater than that of the typical
company in the same industry most likely has _________________.
59. Everything else equal, which variable is negatively related to the intrinsic value of a
company?
60. Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out
60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a
13% return on equity in the future, and if you require a 15% return on the stock, the value of the
stock is _________.
61. A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm’s P/E
ratio?
62. A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of
15% and an ROE of 18%. What is the stock’s P/E ratio?
63. A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and
the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per
share, what is the value of the stock?
64. Transportation stocks currently provide an expected rate of return of 15%. TTT, a large
transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60
per share, what must be the market’s expectation of the constant-growth rate of TTT dividends?