Chapter 08 – Equity Valuation
48. Using the constant growth model, an increase in the required rate of return from 17 to 20 percent combined with an
increase in the growth rate from 8 to 11 percent would cause the price to
a.
rise more than 3%.
b.
rise less than 3%.
c.
remain constant.
d.
fall more than 3%.
e.
fall less than 3%.
49. Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an
increase in the growth rate from 8 to 12 percent would cause the price to
a.
fall more than 4%0
b.
fall less than 4%.
c.
rise more than 4%.
d.
rise less than 4%.
e.
remain constant.
50. Refer to Exhibit 8.1. How much should you be willing to pay for the stock if you require a 17 percent return?
a.
b.
c.
d.
e.
51. Refer to Exhibit 8.1. How much should you be willing to pay for the stock if you feel that the 5 percent growth rate
can be maintained indefinitely and you require a 17 percent return?
a.
b.
c.
d.
e.
Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The National Motor Company’s last dividend was $1.25, and the directors expect to maintain the historic 4 percent annual
52. Refer to Exhibit 8.2. How much should you be willing to pay for the stock if you require a 16 percent return?
a.
b.
c.
d.
e.
53. Refer to Exhibit 8.2. How much should you be willing to pay for the stock if you feel that the 7 percent growth rate
can be maintained indefinitely and you require a 16 percent return?
a.
b.
c.
d.
e.
54. Ross Corporation paid dividends per share of $1.20 at the end of 1990. At the end of 2000, it paid dividends per share
of $3.50. Calculate the compound annual growth rate in dividends.
a.
52.17 percent
b.
34.28 percent
c.
23 percent
d.
19.17 percent
Chapter 08 – Equity Valuation
e.
11.29 percent
55. Hunter Corporation had a dividend payout ratio of 63 percent in 1999. The retention rate in 1999 was
a.
37 percent.
b.
63 percent.
c.
50 percent.
d.
0 percent.
e.
100 percent.
56. The beta for the DAK Corporation is 1.25. The yield on 30-year T-bonds is 5.65 percent, and the long-term average
return on the S&P 500 is 11 percent. Calculate the required rate of return for DAK Corporation.
a.
12.34 percent
b.
7.06 percent
c.
13.74 percent
d.
5.35 percent
e.
5.65 percent
57. Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows,
5 percent next year, 15 percent in year two, and 25 percent in year 3. After that growth is expected to level off to a
constant growth rate of 10 percent per year. The required rate of return is 15 percent. Calculate the intrinsic value using
the multistage model.
a.
b.
c.
d.
e.
Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8 percent per year for
the next five years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the
appropriate discount rate is 7 percent.
58. Refer to Exhibit 8.3. The dividends for years 1, 2, and 3 are
a.
$2, $2.08, and $2.16.
b.
$2, $2.05, and $2.10.
c.
$2.16, $2.24, and $2.32.
d.
$2.16, $2.33, and $2.52.
e.
$2.07, $2.14, and $2.21.
59. Refer to Exhibit 8.3. The future price of the stock in year 5 is
a.
$113.40.
b.
$122.47.
c.
$132.27.
d.
$142.85.
e.
$154.35.
60. Refer to Exhibit 8.3. The present value today of dividends for years 1 to 5 is
a.
$4.06.
b.
$10.28.
c.
$12.40.
d.
$14.52.
e.
$10.0.
61. Refer to Exhibit 8.3. The price of the stock today (P0) is
a.
$136.29.
b.
$133.03.
c.
$120.33.
d.
$123.43.
e.
$126.60.
Chapter 08 – Equity Valuation
Exhibit 8.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year
for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the
appropriate discount rate is 7 percent.
62. Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are
a.
$1.5, $2.0, and $2.05.
b.
$1.64, $1.78, and $1.94.
c.
$1.64, $1.94, and $2.24.
d.
$1.5, $2.40, and $3.30.
e.
$2.07, $2.14, and $2.21.
63. Refer to Exhibit 8.4. The future price of the stock in year 3 is
a.
$81.75.
b.
$84.81.
c.
$92.56.
d.
$101.85.
e.
$111.16.
64. Refer to Exhibit 8.4. The present value today of dividends for years 1 to 3 is
a.
$4.67.
b.
$3.08.
c.
$5.67.
d.
$4.5.
e.
$1.53.
65. Refer to Exhibit 8.4. The price of the stock today (P0) is
a.
$84.81.
b.
$87.81.
c.
$91.09.
d.
$94.32.
e.
$97.61.
66. Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you
believe that the appropriate discount rate is 15 percent and the long-term growth rate in dividends is 6 percent, and
earnings is 6 percent, then the firm’s P/E ratio is
a.
8.33.
Chapter 08 – Equity Valuation
b.
33.33.
c.
44.44.
d.
11.11.
e.
10.10.
67. What is the value of a 10 percent semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has
a required rate of return of 9 percent?
a.
$1,021.95
b.
$1,038.90
c.
$1,039.56
d.
$1,064.18
e.
$1,078.23
68. What is the value of a preferred stock that has a par value of $100, a required rate of return of 11 percent, and pays a 7
percent annual dividend?
a.
$63.64
b.
$157.14
c.
$909.09
d.
$1,428.57
e.
$2,500.00
69. XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent
annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of
this common stock?
a.
b.
c.
d.
e.
Exhibit 8.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just
paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are
expected to grow at a constant rate of 9 percent forever.
70. Refer to Exhibit 8.5. If the required return is 14 percent, what is the value of Fast Grow Corporation common stock
today?
a.
b.
c.
d.
e.
71. Refer to Exhibit 8.5. Assume that the annual dividend grows at a constant rate of 9 percent indefinitely instead of the
supernormal growth. How much is the stock worth if dividends grow annually at 9 percent?
a.
b.
c.
d.
e.
72. What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000
that matures in 20 years if you require an 8 percent return?
a.
$9,652.89
b.
$10,356.65
c.
$11,359.03
d.
$11,979.28
e.
$12,385.62
73. The Absolute Finance Company (AFC) earned $5 a share last year and paid a dividend of $2 per share. Next year, you
expect AFC to earn $6 a share next year and continue its payout ratio. Assume that you expect to sell the stock for $45 a
Chapter 08 – Equity Valuation
year from now. If you require a 13 percent return on this stock, how much would you be willing to pay for it?
a.
b.
c.
d.
e.
74. A company has a dividend payout ratio of 35 percent. If the company’s return on equity is 15 percent, what is the
expected growth rate if no new outside financing is used?
a.
4.50 percent
b.
5.25 percent
c.
7.75 percent
d.
8.25 percent
e.
9.75 percent
75. A company’s dividend last year was $3.00. Dividends are expected to grow indefinitely at 7 percent, and the required
rate of return for the stock is 13 percent. What is the value of the stock today?
a.
b.
c.
d.
e.
76. Which of the following statements regarding fundamental and relative valuation techniques is TRUE?
a.
Both techniques require an appropriate estimate of the required rate of return and the growth rate.
b.
Both techniques require an estimate of a discount rate.
c.
Both techniques require an estimate of future cash flows and a discount rate.
d.
Both techniques require an estimate of future cash flows and a growth rate.
e.
Both techniques require an estimate of future cash flows, the required rate of return, and a growth estimate.
77. All of the following are ways in which a firm can increase its growth rate of equity earnings without any external
financing EXCEPT
a.
decreasing its dividend payments.
b.
increasing its retention ratio.
c.
increasing its return on equity (ROE).
d.
increasing its return on assets (ROA).
e.
All of these are correct.
78. The P/E ratio for BMI Corporation is 21, and the P/S ratio is 5.2. The industry P/E ratio is 35, and the industry P/S
ratio is 7.5. Based on relative valuation, BMI is
a.
undervalued on the basis of relative P/E and relative P/S.
b.
overvalued on the basis of relative P/E and undervalued on the basis of relative P/S.
Chapter 08 – Equity Valuation
c.
undervalued on the basis of relative P/E and overvalued on the basis of relative P/S.
d.
overvalued on the basis of relative P/E and relative P/S.
e.
overvalued on the basis of relative P/E.
79. The gross margin is defined as
a.
Gross Profit/Sales.
b.
Operating Profit/Sales.
c.
Net Income/Sales.
d.
Sales/Gross Profit.
e.
Debt/Long-Term Capital.
80. Operating margins are defined as
a.
Gross Profit/Sales.
b.
Operating Profit/Sales.
c.
Net Income/Sales.
d.
Sales/Gross Profit.
e.
Debt/Long-Term Capital.
81. Net margins are defined as
a.
Gross Profit/Sales.
b.
Operating Profit/Sales.
c.
Net Income/Sales.
d.
Sales/Average Accounts Receivable.
e.
Debt/Long-Term Capital.
82. Accounts receivable turnover is defined as
a.
Gross Profit/Sales.
b.
Operating Profit/Sales.
c.
Net Income/Sales.
d.
Sales/Average Accounts Receivable.
e.
Debt/Long-Term Capital.
83. A high-quality balance sheet typically has
a.
limited footnotes.
b.
a poor reflection of reality.
c.
repeatable earnings.
d.
over use of debt or leverage.
e.
limited use of debt or leverage.