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Exam 5: Stocks

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Question 21

Multiple Choice

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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

F) All of the above
G) C) and E)

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Question 22

Multiple Choice

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last dividend paid by Coppard Incwas $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

F) C) and D)
G) B) and D)

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Question 23

Multiple Choice

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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?

total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

share of Lash Inc.'s 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 11.4%, what is the stock price?

preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm This right helps protect current stockholders against both dilution of control and dilution of value.

cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

Kelly Enterprises's 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?

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?

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.

Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

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 = 6.4% What is the stock's current price?

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return Which of the following statements is CORRECT?

a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

in analyzing a stock, find that its expected return exceeds its required returnThis suggests that you think

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?

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?