Finance- Chapter 9

Allegheny Publishing's stock is expected to pay a year-end dividend, D1, of $4.00. The dividend is expected to grow at a constant rate of 8% per year, and the stock's required rate of return is 12%. Given this information, what is the expected price of the stock, eight years from now? a. $200.00 b. $185.09 c. $171.38 d. $247.60 e. $136.86

b. $185.09

Yore Technology's stock is expected to pay a year-end dividend of $2.00. The stock currently has a price of $40 a share, and the stock's dividend is expected to grow at a constant rate of g% a year. The required return on the stock is 13.4 percent. What is the expected price of Yohe's stock 5 years from today? a. $51.05 b. $55.23 c. $59.87 d. $64.90 e. $66.15

c. $59.87

A stock with a required rate of return of 10% sells for $30 per share. The stock's dividend is expected to grow at a constant rate of 7% per year. What is expected year-end dividend, D1 on the stock? a. $0.87 b. $0.95 c. $ 1.09 d. $0.90 e. $1.05

d. $0.90

Motor Homes Inc. (MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes. The company expects earnings and dividends to grow at a rate of 20% for the next 4 years, after which time there will be no growth (g=0) in earnings and dividends. The company's last dividend was $1.50. The required return (rs) on the stock is 18 percent. What should be the current common stock price? a. $15.17 b. $17.28 c. $22.21 d. $19.10 e. $24.66

a. $15.17

R.E. Lee Inc. is a young company that is expecting growth of 40% for the next three years and then a constant 15%, thereafter. The most recent dividend (Do) was $0.75. The required return on the stock is 17 percent. What is the current price of Lee's stock? a. $77.14 b. $75.17 c. $67.51 d. $73.88 e. $93.20

a. $77.14

Stock X has required return of 12% and a dividend yield of 5%, and its dividend is expected to grow at a constant rate forever. Stock Y has a required return of 10%, a dividend yield of 3%, and its dividend is expected to grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is CORRECT? a. Stock X pays a higher dividend per share than Stock Y. b. Stock Y pays a higher dividend per share than Stock X. d. Stock Y has a lower expected growth rate than Stock X. e. Stock Y has the higher expected capital gains yield.

a. Stock X pays a higher dividend per share than Stock Y

Which of the following statements is correct? a. the constant growth model takes into consideration the capital gains earned on a stock. b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate is never expected to become constant. c. Two firms with the same expected divided and growth rate must also have the same stock price. d. If a stock has a required rate of return rs= 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

a. The constant growth model takes into consideration the capital gains earned on a stock.

Stock X and Stock Y sell at the same price. Stock X has a required return of 12%. Stock Y has a required return of 10%. Stock X's dividend is expected to grow at a constant rate of 6% a year, while Stock Y's dividend is expected to grow at a constant rate of 4%. Assume that the market is in equilibrium and expected returns equal required returns. Which of the following statements is correct? a. Stock X has a higher dividend yield than Stock Y. b. Stock Y has a higher dividend yield than Stock X. c. One year from now, Stock X's price is expected to be higher than Stock Y's price. d. Stock Y has a higher capital gains yield. e. Stock X has the higher expected year-end dividend.

c. One year from now, Stock X's price is expected to be higher than Stock Y's price.

A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected to at a rate of fall 5% a year forever (g=-5%). The company's expected and required rate of return is 15%. Which of the following statements is CORRECT? a. The company's stock price is $20. b. The company's dividend yield 5 years from now is expected to be 10%. c. The company's stock price next year is expected to be $9.50. d. The company's expected capital gains yield is 5%. e. The constant growth model cannot be used because the growth rate is negative.

c. The company's stock price next year is expected to be $9.50.

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is correct? a. The expected return on the stock is 5% a year. b. The stock's dividend yield is 5%. c. The stock's price one year from now is expected to be 5% higher. d. The stock's required return must be equal to or less than 5%. e. The price of the stock is expected to decline in the future.

c. the stock's price one year from now is expected to be 5% higher.

A stock is expected to have a dividend per share of $.60 at the end of the year (D1=.60). The dividend is expected to grow at a constant rate of 7% per year, and the stock has a required return of 12%. What is the expected price of the stock five years from today? (That is, what is Ps?) a. $12.02 b. $15.11 c. $15.73 d. $16.83 e. $21.15

d. $16.83

An analyst is estimating the intrinsic value Harkleroad Technologies' stock. Harkleroad's free cash flow is expected to be $25 million this year, and grow at a constant rate of 7% a year. The company's WACC is 10%. Harkleroad has $200 million of long-term debt and preferred stock, and 30 million outstanding shares of common stock. What is the estimated per-share price of Harkleroad Technologies' common stock? a. $1.67 b. $5.24 c. 18.37 d. $21.11 e. $27.78

d. $21.11

Womack Toy Company's stock is currently trading at $25 per share. The stock's dividend is projected to increase at a constant rate of 7% per year. The required rate of return on the stock, rs, is 10%. What is the expected price of the stock 4 years from today? a. $36.60 b. $34.15 c. $28.39 d. $32.77 e. $30.63

d. $32.77

Your company just paid a dividend of $2.00. The dividend growth rate is expected to be 4% for 1 year, 5% the next year, then 6% for the following year, and a constant 7% thereafter. The stock's required return (rs) is 10%. What is the current stock price? a. $53.45 b. $60.98 c. $64.49 d. $67.47 e. $69.21

d. 69.47

Stock X is expected to pay a dividend of $3.00 at the end of the year (that is, D1= $3.00). The dividend is expected to grow at a constant rate of 6% a year. The stock currently trades at a price of $50 a share. Assume that the stock is in equilibrium, that is, the stock's price equals its intrinsic value. Which of the following statements is NOT CORRECT? a. the stock's required return is 12%. b. the stock's expected price 10 years from now is $89.54. c. the stock's expected dividend yield is 6%. d. the stock's expected capital gains yield is 6%. e. the stock's expected dividend at the end of Year 2 is $3.12.

e. the stock's expected dividend at the end of Year 2 is $3.12.