University of West Georgia

FINC MISC

Chapter 7

1)Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

2. A stock is expected to pay a year-end dividend of $00, i.e., D1 = $00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
3. If you use the constant dividend growth model to value a stock, which of the following is certain to cause you to increase your estimate of the current value of the stock?
4. An increase in a firm's expected growth rate would normally cause the firm's required rate of return to
5. Which of the following statements is CORRECT?
6. The common stock of Hyperion Inc. just paid an annual dividend of $1.50. Its dividends are expected to grow at a constant rate of 4 percent per year forever. If the required rate of return for this stock is 12 percent, what is the price of the stock?
7. Orwell Building Supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

8. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
9. A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock?
10. The common stock of Darkover Inc. just paid an annual dividend of $1.00. The dividend is expected to grow at a constant rate forever. The required rate of return for this stock is 11.8 percent. If the current price of the stock is $ 48.00 what is the expected growth rate of the dividends? Give your answer to the nearest .1%. Do not use the % sign in your answer. For example, if the answer is 9.2% enter your answer as 9.2 rather than .092 or 9.2%.
11. Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?
12. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
13. The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.
14. The discount rate in equity valuation is composed entirely of
15. The value of common stock today depends on
16. If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
17. Pharsalus Inc. just paid a dividend of $ 1.68 per share. This dividend is expected to grow at a rate of 6.4 percent per year forever. The appropriate discount rate for Pharsalus's stock is 10.8 percent. What is the price of the stock? Enter your answer to the nearest penny. Do not use the $ sign in your answer.
18. Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
19. Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley's stock is 17 percent. What is the price of the stock?
20. RITO stock is currently selling for $ 44.18 a share. If the company is expected to pay a dividend of $ 2.78 a year from now and dividends are expected to grow at 8.7 % thereafter, what is ks (or, required rate of return) for a share of RITO stock? Show your answer to the nearest .1%. Do not use the % sign in your answer. For example, if the answer is 9.2% enter your answer as 9.2 rather than .092 or 9.2%.
21. Based on the corporate valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. Bizzaro has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?
22. Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?