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CORPORATE FINANCE ProbSet Chapter 7 (13ed.) ? Stock Valuation




Question;CORPORATE FINANCE;ProbSet;Chapter 7 (13ed.) ? Stock Valuation;1. A stock expects to pay a year-end dividend of;$2.00 a share. Last year?s dividend has;already been paid. The dividend is;expected to fall 5 percent a year, forever.;The company?s expected and required rate of return is 15%. Which of the following statements is most;correct?;a.;The company?s stock price is $10.;b.;The company?s expected dividend yield 5 years from now will be 20;percent.;c.;The company?s stock price 5 years from now is expected to be $7.74.;d.;Both answers b and c are correct.;e.;All of the above answers are correct.;2. The relationship;between a stock?s required and expected rates of return determines the;security?s;equilibrium price level. Which of the;following is true?;At;this equilibrium level, a stock?s required return will equal a bond?s;coupon.If the;expected rate of return is less than the required rate, investors will;desire to buythe stock and there will be a;tendency for the price to rise.;c. If the expected rate of return is greater;than the required rate, investors will try to;purchase shares of the stock, which;will drive the price up.;d. If the expected rate of return is less than;the required rate, investors will desire to sell;the stock and there will be a;tendency for the price to rise.;Both;statement c and d are correct.;3. Which of the;following statements regarding constant growth stock valuation is;most correct?;a. Assume that the required rate of return on a;given stock is 12%. If the stock?s;dividend is growing at a constant;rate of 4%, its expected dividend yield is 4% as well.;b.;The expected capital gain yield on a stock is equal to the expected;return less;the dividend yield.;A;stock?s dividend yield must at least equal the expected growth rate.All of;the answers above are correct.Answers;b and c are correct.;4. Which of the;following factors in the discounted cash flow (DCF) approach to;estimating the;cost of common equity is the leastdifficult;to estimate?;Expected;growth rate, g.Dividend;yield, D1/Po.Required;return, Ks.Expected;rate of return, KsAll of;the above are equally difficult to estimate.;5. A stock is not;expected to pay a dividend over the next four years. Five years from now;the company;anticipates that it will establish a dividend of $1.00 per share. Once the;dividend is;established, the market expects that the dividend will grow at constant rate of;5;percent per year;forever. The risk-free rate is 5;percent, the company?s beta is 1.2, and;the market risk;premium is 5 percent. The required rate;of return on the company?s stock is;expected;to remain constant. What is the current;stock price?;a. $7.36;b. $8.62;c. $9.89;d. $10.98;e. $11.53;6. ABC Company has;been growing at a 10 percent rate, and it just paid a dividend of Do =.;$3.00. Due to a new product, ABC expect to achieve a;dramatic increase in its short-run growth rate, to 20 percent annually for the;next 2 years. After this time, growth is;expected to return to the long-run constant rate of 10 percent. The company?s beta is 2.0, the required return;on an average stock is 11 percent, and the risk-free rate is 7 percent. What should the dividend yield be today?;a. 3.93%;b. 4.60%;c. 10.00%;d. 7.54%;e. 2.33%;7. Albright Motors is;expected to pay a year-end dividend of $3.00 a share.;The stock;currently sells for $30 a share. The;required (and expected) rate of return;on the stock is;16%. If the dividend is expected to grow;at a constant rate, g, what is g?;13.00%10.05%6.00%5.33%7.00%;8. Cartwright;Brothers? stock is currently selling for $40. a share. The stock is expected to;pay a $2.;dividend at the end of the year. The stock?s dividend is expected to grow at a;constant rate of;7 percent a year forever. The risk-free;rate is 6 percent and the market;risk premium is;also 6 percent. What is the stock?s;beta?;a. 1.06;b. 1.00;c. 2.00;d. 0.83;e. 1.08;9. Over;the past few years, Swanson Company has retained, on the average, 70 percent of;its earnings in the business. The future;retention rate is expected to remain at 70 percent of earnings, and long-run;earnings growth is expected to be 10 percent.;If the risk-free rate is 8 percent, the ex?pected return on the market;is 12 percent, Swanson's beta is 2.0, and the most recent dividend, D0;was $1.50, what is the most likely market price and P/E ratio (P0/E1);for Swanson's stock today?;a. $27.50, 5.0x;b. $33.00, 6.0x;c. $25.00, 5.0x;d. $22.50, 4.5x;e. $45.00, 4.5x;10. Chadmark;Corporation is expanding rapidly, and it currently needs to retain all of its;earnings, hence it does not pay any dividends.;However, investors expect Chadmark to begin paying dividends with the;first dividend of $0.75 coming 2 years from today. The dividend should grow at a constant rate;of 10 percent per year. If the required;return on the stock is 16 percent, what is the value of the stock today?;11. HBT;Corporation has never paid a dividend.;Its current free cash flow is $1,200,000 and is expected to grow at a;constant rate of 4%. The overall cost of;capital is 10%. What is HBT' value of;operations (in millions)?;12. Assume that;as investment manager of Maine Electric Company's pension plan (which is exempt;from income taxes), you must choose between Exxon bonds and GM preferred;stock. The bonds have a $1,000 par;value, they mature in 20 years, they have a 7% stated interest rate paid;semi-annually, they are callable at Exxon's option at a price of $1,150 after 5;years, and they sell at a price of $815.98 per bond. The Preferred stock is perpetuity: it pays a;dividend of $1.50 each quarter, and it sells for $75 per share. Assume interest rates do not change. What is the most likely effective annual;rate of return on the higher yielding security?;13. Assume an all equity firm has;been growing at a 15 percent annual rate and is expected to continue to do so;for 3 more years. At that time, growth;is expected to slow to a constant 4 percent rate. The firm maintains a 30 percent payout ratio;and this year's retained earnings net of dividends were $1.4 million. The firm's beta is 1.25, the risk-free rate;is 8 percent, and the market risk premium is 4 percent. If the market is in equilibrium, what is the;market value of the firm's common equity (1 million shares outstand?ing)?;14. Dozier Corp;is a fast growing supplier of office products.;Analysts project the following free cash flows (FCFs) during the next;three years, after which FCF is expected to grow at a constant 7% rate. Dozier?s cost of capital is 13%.;Time 1 2 3;Free cash;Flow ($mill) -$20 $30 $40;a. What;is Dozier?s terminal, or horizon value?;b. Suppose;Dozier has $10 million in marketable securities, $100 million in debt, and 10;million shares of stock. What is the;price per share?;What is the current value of the operations


Paper#51364 | Written in 18-Jul-2015

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