Managerial Finance Problem Review Set Stock Valuation

1.)
The constant growth DCF model used to evaluate the prices of common
stocks is essentially the same as the model used to find the price of
perpetual preferred stock or any other perpetuity.
a.
b.

True
False

2.)
If two firms have the same current dividend and the same expected
dividend growth rate, their stocks must sell at the same current price
or else the market will not be in equilibrium.
a.
b.

True
False

3.)
Stock A has a required return of 10% and a price of $25, and its
dividend is expected to grow at a constant rate of 7% per year. Stock B
has a required return of 12% and a price of $40, and its dividend is
expected to grow at a constant rate of 9% per year. Which of the
following statements is CORRECT?
a.
b.
c.
d.
e.

If the stock market

price.
The two stocks have
If the stock market
expected return.
The two stocks have
The two stocks have

were efficient, these two stocks would have the same

the same dividend yield.
were efficient, these two stocks would have the same
the same expected capital gains yield.
the same expected year-end dividend.

4.)
Stocks A and B have the same price, but Stock A has the higher required
rate of return. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.

If Stock A has a lower dividend yield than Stock B, its expected capital
gains yield must be higher than Stock Bs.
Stock B must have a higher dividend yield than Stock A.
Stock A must have a higher dividend yield than Stock B.
If Stock A has a higher dividend yield than Stock B, its expected
capital gains yield must be lower than Stock Bs.
Stock A must have both a higher dividend yield and a higher capital
gains yield than Stock B.

5.)
A stock is expected to pay a year-end dividend of $2.00, i.e., D1 =
$2.00. The dividend is expected to decline at a rate of 5% a year
forever (g = -5%). If the companys expected and required rate of
return is 15%, which of the following statements is CORRECT?
a.
b.
c.
d.
e.

The companys current stock price is $20.

The companys dividend yield 5 years from now is expected to be 10%.
The constant growth model cannot be used because the growth rate is
negative.
The companys expected capital gains yield is 5%.
The companys stock price next year is expected to be $9.50.

6.)
Stocks X and Y sell at the same price. Stock X has a required return of
12% while Y's required return is 10%. Stock Xs dividend is expected to
grow at a constant rate of 6% a year, while Stock Ys dividend is
expected to grow at a constant rate of 4%. If the market is in
equilibrium so that expected returns equal required returns, which of
the following statements is CORRECT?
a.
b.
c.
d.
e.

Stock X has a higher dividend yield than Stock Y.

Stock Y has a higher dividend yield than Stock X.
One year from now, Stock Xs price is expected to be higher than Stock
Ys price.
Stock X has the higher expected year-end dividend.
Stock Y has a higher capital gains yield.

7.)
The expected return on Northeast Corporations stock is 14%. The stocks
dividend is expected to grow at a constant rate of 8%, and it currently
sells for $50 a share. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.

The
The
The
The
The

stocks dividend yield is 7%.

stocks dividend yield is 8%.
current dividend per share is $4.00.
stock price is expected to be $54 a share one year from now.
stock price is expected to be $57 a share one year from now.

8.)
Stock A has a beta of 1.1 and Stock B's beta is 0.9. The market risk
premium is 6%, and the risk-free rate is 6.3%. Both stocks have a
constant dividend growth rate of 7%. If the market is in equilibrium,
which of the following statements is CORRECT?
a.
b.
c.
d.
e.

Stock
Stock
Stock
Stock
Stock

A must have a higher stock price than Stock B.

A must have a higher dividend yield than Stock B.
Bs dividend yield equals its expected dividend growth rate.
B must have the higher required return.
B could have the higher expected return.

9.)
A stock is expected to pay a dividend of $0.75 at the end of the year.
The required rate of return is rs = 12.5%, and the expected constant
growth rate is g = 8.5%. What is the current stock price?
a.
b.
c.
d.
e.

$17.82
$18.28
$18.75
$19.22
$19.70

10.)
A share of common stock has just paid a dividend of $2.00. If the
expected long-run growth rate for this stock is 5.0%, and if investors'
required rate of return is 10.5%, what is the stock price?
a.
b.
c.
d.
e.

$35.39
$36.30
$37.23
$38.18
$39.14

11.)
If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the
stocks expected total return for the coming year?
a.
b.
c.
d.
e.

7.54%
7.73%
7.93%
8.13%
8.34%

12.)
The Zumwalt Company is expected to pay a dividend of $2.25 per share at
the end of the year, and that dividend is expected to grow at a constant
rate of 5.00% per year in the future. The company's beta is 1.15, the
market risk premium is 5.50%, and the risk-free rate is 4.00%. What is
the company's current stock price?
a.
b.
c.
d.
e.

$42.25
$43.31
$44.39
$45.50
$46.64

13.)
Goode Inc.'s stock has a required rate of return of 11.50%, and it sells
for $25.00 per share. Goode's dividend is expected to grow at a constant
rate of 7.00% per year. What was Goode's last dividend, D0?
a.
b.
c.
d.
e.

$0.95
$1.05
$1.16
$1.27
$1.40

14.)
You must estimate the intrinsic value of Tsetseko Technologies stock.
Tsetseko's end-of-year free cash flow (FCF) is expected to be $17.50
million, and it is expected to grow at a constant rate of 7.00% a year
thereafter. The companys WACC is 10.00%. Tsetseko has $125.00 million
of long-term debt plus preferred stock, and there are 15.00 million
shares of common stock outstanding. What is Tsetseko's estimated
intrinsic value per share of common stock?
a.
b.
c.
d.
e.

$28.16
$29.33
$30.56
$31.78
$33.05

15.)
Carter's preferred stock pays a dividend of $1.00 per quarter. If the
price of the stock is $50.00, what is its nominal (not effective) annual
rate of return?
a.
b.
c.
d.
e.

7.23%
7.41%
7.61%
7.80%
8.00%

16.)
The Upton Company's last dividend was $1.75. Its dividend growth rate
is expected to be constant at 18.00% for 2 years, after which dividends
are expected to grow at a rate of 6.00% forever. Upton's required
return (rs) is 12.00%. What is Upton's current stock price?
a.
b.
c.
d.
e.

$37.15
$38.10
$39.06
$40.03
$41.03

Solutions
1.)
2.)
3.)
4.)
5.)
6.)
7.)
8.)
9.)
10.)
11.)
12.)
13.)
14.)
15.)
16.)

a
b
b
a
e
c
d
b
c
d
e
a
b
c
e
b