chapter 13

Radverb Inc. paid a dividend of $2.00 last year. The company expects to increase the dividend at a constant rate of 2% per year, indefinitely. The current price for the stock is $34. What will the price of Radverb's stock be if the required return falls by half (by 50%)?

$102.00 r falls from 8 to 4%.

Shocktown Inc. paid a dividend of $1.20 last year. The company expects to increase the dividend at a constant rate of 5% per year, indefinitely. The stock price is $10.68 currently, with a beta of 1.2. The market risk premium is 9% and the risk-free rate is 6%. What will the price of Shocktown's stock be if the market risk premium falls to 8%?

$11.89

Dogtown Inc. paid a dividend of $1.40 last year. The company expects to increase the dividend at a constant rate of 2% per year, indefinitely. The stock price is $14.28 currently. The market risk premium is 10% and the risk-free rate is 4%. What will the price of Dogtown's stock be if its beta rises by 20%?

$12.31

Bigtown Inc. will pay a dividend of $1.50 next year. The stock price is $13.39 currently, with a beta of 0.9. The market risk premium is 8% and the risk-free rate is 6%. What will the price of Bigtown's stock be if the dividend growth rate doubles?

$16.30 g increases from 2% to 4%

Moneyball Sports Complex, Inc. had Earnings before Interest and Tax of $300 million last year, a Depreciation expense of $50 million, net Capital Expenditures of $100 million and added $10 million to its net working capital. These figures are all expected to grow at a constant rate of 5%, indefinitely. The firm finances with 50% debt and 50% equity and the tax rate is 30%. Before tax cost of debt is 10% and the cost of equity is 22%. Calculate firm value.

$1657.89m

A stock has a current price of $24. Investors require a 10% return on this constant dividend stock. The risk-free rate is 2% and the expected return on the market is 12%. If the beta on this stock increases by 40%, what is the new price of this stock?

$18.18 g=0, Old beta = .8

Moneyball Sports Complex, Inc. had Earnings before Interest and Tax of $300 million last year, a Depreciation expense of $50 million, net Capital Expenditures of $100 million and added $10 million to its net working capital. These figures are all expected to grow at a constant rate of 5%, indefinitely. The firm finances with 50% debt and 50% equity and the tax rate is 30%. Before tax cost of debt is 10% and the cost of equity is 22%. Calculate FCFE.

$197m

ABC Inc. just paid a dividend of $1.00 this year. The stock price is $15.43 currently. The market risk premium is 15% and the risk-free rate is 6%. What will the price of ABC's stock be if the dividend growth increases by 25%?

$22.00 g increases from 8% to 10%

Microshort Inc. stock paid a dividend of $1.00 over the past year. The dividend is expected to grow at a rate of 20% over the next three years. After the three-year high-growth period, the dividends are expected to grow at a 10% rate, indefinitely. If investors require a 15% return on Microshort stock, what is its current price?

$28.25

Hyper, Inc. is a growing firm that chooses to payout only 20% of its earnings as dividends (thus, it has a plowback ratio of .8). Hyper expects EPS next year of $5 and and a Return on Equity of 15%. This ROE is expected to be maintained indefinitely and is also appropriate to use for Hyper's required return on equity. Given this information, what is the current price of Hyper, Inc. stock?

$33.33

Chiptech, Inc. paid a $3 dividend last year and is expected to grow the dividend at 10% for the next 2 years. The dividend will then grow at a constant rate of 4%, thereafter. If investors require a return of 12% on this stock, what is Chiptech's current price?

$43.46

Bosstown Inc. paid a dividend of $1.00 last year. The company expects to increase the dividend at a constant rate of 6% per year, indefinitely. The required return for Bosstown stock is 11.6%% and the risk-free rate is 6%. What will the price of Bosstown's stock be if the required return falls to 8%?

$53.00

Public Imagination, Ltd. has an ROE of 16%, a plowback ratio of 75%, earnings for next year of $2 per share, and its stock has a required return of 18%. What is the current stock price for PIL?

$8.33

Public Imagination, Ltd. has an ROE of 16%, a plowback ratio of 75%, earnings for next year of $2 per share, and its stock has a required return of 18%. What is the PVGO for PIL?

-$2.78 PVGO = P0 - E/k

A firm's stock price is currently $48 per share. The company will pay a $3 dividend next year and investors require a 10% rate of return for investing in this stock. What is the growth rate that investors anticipate for this company's dividends?

3.75% g = r - D1/Po

A firm with a low plowback ratio, relative to its peers, is more likely to be considered which of the following?

A value firm

The product of what two forecasts is the estimate of the end-of-period level of the market?

An Estimate of the Earnings Multiplier Corporate Profits for the Coming Period

Consider a company with a P/E ratio of 15, in an industry with an average P/E ratio of 20, and the same required return (k) as the industry average. This company is potentially an appropriate addition to an investor's portfolio for which of the following reasons?

The stock could be considered a value investment.

Why will value investors emphasize earnings from real estate, plant, and equipment in their valuation?

They are the most stable sources of earnings

Two valuation approaches commonly applied to the aggregate stock market include

a dividend discount model an earnings multiple approach

Book value provides a useful benchmark in the Price to Book ratio, because

book value includes the accumulated retained earnings for the firm

True or false: Book value provides a useful measure of the minimum value of a firm.

false

The most difficult aspect of DCF models is accurately predicting

growth opportunities and future growth rates

_____ value is the present value of a firm's expected future net cash flows discounted by the required rate of return.

intrinsic

An assumption of the constant growth model is that the stock price grows at the same rate as

its dividends.

The constant growth model is used within the multistage growth model because

the timeline is infinite

_____ management is the practice of using flexibility in accounting rules to manipulate the apparent profitability of the firm.

Earnings

The PEG ratio adjusts the P/E ratio, the most commonly used ratio in valuation by comparables, by including what factor in the calculation?

Earnings growth

Which valuation method is most closely associated with the process of determining the intrinsic value of a stock?

Expected returns will increase Required returns will increase

Company A and Company B have the same P/E ratio, but Company A has a lower PEG ratio. Company A must have a slower growth rate for earnings than Company B.

False

The Price-to-Earnings ratio can be used as a valuation benchmark even in cases where a firm has negative earnings.

False

Which of the following are typically used in the denominator of the price-to-cash-flow ratio?

Operating Cash Flow Free Cash Flow

Low P/B, P/E, and high dividend yield are often used as indicators for "value" stocks. Which of the following attributes enhance these value indicators, but are not consistent with the company's stock being a true investment value?

Poor growth prospects Large dividends in firm with sizable inside ownership Earnings management boosts earnings following previous weak reported earnings

Over time, the maximum a firm should be able to grow its dividends will be equal to its

ROE

Increasing the market risk premium will cause the price of the stock to do what?

Fall