FNAN 405 Chapter 6 Das

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return? A.) $12.63 B.) $12.95 C.) $13.05 D.) $13.37 E.) $13.72

A.) $12.63 P0= 1.20 / .12-.025

Millers Farm has 120,000 shares of stock outstanding, sales of $850,000, and net income of $55,000. Financial analysts believe the price-earnings ratio for this firm should be 15.8. Given this information, what should be the current stock price? A.) $7.24 B.) $8.87 C.) $14.85 D.) $14.57 E.) $15.21

A.) $7.24 55,000/120000 * 15.8 = 7.24

Blue Water Tours just paid an annual dividend of $0.72 a share. The firm has a policy of increasing the dividend by 3.0 percent annually. What is the current value of this stock at a discount rate of 11.7 percent? A.) $8.52 B.) $8.78 C.) $8.91 D.) $9.02 E.) $9.09

A.) $8.52 D(0) x (1+g)/(k-g) 0.72 x (1.03)/(.117-.03) 8.52

Which one of the following correctly expresses the clean surplus relationship? A.) The change in book value per share is equal to earnings per share minus dividends B.) The change in retained earnings is equal to net income. C.) The change in market value per share is equal to the change in book value per share. D.) The change in market value per share is equal to earnings per share minus dividends E.) The rate of change in book value per share is equal to the firms discount rate.

A.) The change in book value per share is equal to earnings per share minus dividends.

The Satellite Shoppe has current sales per share of $7.15. The sales per share are expected to increase at an annual rate of 11 %. The historical P/E ratio is 16.2 and the historical P/S ratio is 8.4. What is the expected price of this stock one year from now? A.) $59.72 B.) $66.67 C.) $74.92 D.) $115.18 E.) $129.00

B.) $66.67 8.4 x 7.15(1.11)= 66.67

Beach & Company reported net income of $40 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $8 million. Free cash flow is expected to grow at a rate of 5% for the foreseeable future. Beach faces a 40% tax rate and has a 0.50 debt to equity ratio with $200 million (market value) in debt outstanding. Beaches equity beta is 1.25, the risk free rate is currently 4.5% and the market risk premium is estimated to be 8.0%. What is the current total value of Beach & Company (in millions)? A.) $655.90 B.) $730.18 C.) $840.95 D.) $919.49 E.) $1025.95

B.) $730.18 Step 1: Asset Beta 1.25/(1+0.5(1-.40))=0.96 Step 2: Required Return 4.5%+.96(8%)=12.19% Step 3: FCF $40+18-8 million= 50 million Step 4: Firm Value 50 * (1+.05) / (.1219-.05)= 730.18

A firm has net income of $198,500, and total equity of 1.15 million. There are 220,000 shares of stock outstanding at a price per share of $14.80. What is the firms price-earnings ratio? A.) 16.21 B.) 16.40 C.) 17.09 D.) 17.28 E.) 17.94

B.) 16.40 14.80/(198500/220000)= 16.40

Based on the dividend discount model, and increase in which of the following will lower the current value of a stock? I. Amount of the next dividend II. Dividend growth rate III. Discount Rate A.) I only B.) III only C.) I and II only D.) II and III only E.) I, II, and III

B.) III only

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio? A.) two-stage growth B.) residual income C.) perpetual dividend growth D.) super-normal growth E.) perpetual cash flow.

B.) Residual income

The current book value per share of B.L. Black & Sons is $5.65 and the required return on the stock is 16 %. The firm expects earnings per share of $1.85 next year with annual earnings growth of 4.5 percent. What is the current market value of this stock? A.) $9.16 B.) $10.91 C.) $13.88 D.) $18.18 E.) $20.30

C.) $13.88

Factory Stores pays annual dividends and increases those dividends by 2 percent each year. The stock is currently valued at $12 a share and has a required return of 16 percent. You own 400 shares of this stock. What is the total amount of dividend income you should expect to receive next year? A.) $646 B.) $659 C.) $672 D.) $685 E.) $699

C.) $672 P(0)= D(1) / (k-g) 12= D(1) / (.16-.02) D(1)=12 x .14 D(1)= 1.68 1.68 x 400= 672

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be 5 years from today? A.) $6.96 B.) $7.04 C.) $7.10 D.) $7.18 E.) $7.25

C.) $7.10 0.82(1.02)^6 /.15-.02= 7.10

The Satellite Shoppe has current sales per share of $8.40. The sales per share are expected to increase at an annual rate of 12 percent. The historical P/E ratio is 16.2 and the historical P/S ratio is 7.6. What is the expected price of this stock one year from now? A.) $59.72 B.) $66.67 C.) $71.50 D.) $115.18 E.) $129.00

C.) $71.50 8.40 x (1+.12) x 7.6= 71.50

Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 % annually. What is the current value of this stock if the applicable discount rate is 13.5 %? A.) $6.44 B.) $7.83 C.) $8.17 D.) $9.55 E.) $13.10

C.) $8.17

The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the ________dividend growth model. A.) flexible B.) increasing C.) two-stage D.) stepped up E.) geometric

C.) two-stage

Newcomer Mills is a relatively new firm which will retain all of its earnings for the next three years. Four years from now, the firm expects to pay its first dividend of $0.15 a share. After that, it intends to increase the dividend by 5 percent annually. What is the value of this stock today at a discount rate of 10%. A.) $1.53 B.) $1.78 C.) $2.04 D.) $2.25 E.) $2.60

D.) $2.25

Hype Tech expects its net income to grow at 20 % a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firms stock? A.) irregular dividend B.) constant perpetual growth C.) constant dividend D.) two-stage dividend growth E.) perpetuity formula

D.) Two-stage dividend growth

Southern Foods just paid an annual dividend of $1.10 a share. Management estimates the dividend will increase by 10 percent a year for the next four years. After that, the annual dividend growth rate is estimated at 3.2 percent. The required rate of return is 12 %. What is the value of this stock today? A.) $12.55 B.) $13.00 C.) $14.54 D.) $15.81 E.) $16.21

E.) $16.21

L.B Jay has net income of $38,000, total assets of $437,000, total liabilities of $208,000, and a price-book ratio of 3.8. There are 60,000 shares of stock outstanding. What is the firms price-earnings ratio? A.) 18.72 B.) 19.11 C.) 19.28 D.) 20.80 E.) 22.90

E.) 22.90

A firms current stock price divided by the firms revenue per share is referred to as which one of the following ratios? A.) price-earnings B.) price-book C.) price-income D.) price-sales E.) price-cash flow

E.) Price- Cash flow