CHAPTER 5- VALUING STOCKS



CHAPTER 5- VALUING STOCKS

1. A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now?

A) $82.20

B) $86.20

C) $87.20

D) $91.20

Answer: B Difficulty: Medium Page: 139, 1st paragraph.

Expected return = [pic]

14% = [pic]

$11.20 = P1 – $75

$86.20 = P1

2. What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

A) $22.86

B) $28.00

C) $42.00

D) $43.75

Answer: D Difficulty: Medium Page: 144, 1st paragraph.

Po = [pic]

3. What constant growth rate in dividends is expected for a stock valued at $32.00 if next year’s dividend is forecast at $2.00 and the appropriate discount rate is 13%?

A) 5.00%

B) 6.25%

C) 6.75%

D) 15.38%

Answer: C Difficulty: Medium Page: 145, 1st paragraph.

$32.00 = [pic]

$4.16 – 32g = $2.00

$2.16 = 32 g

.0675 = g

6.75% = g

4. If next year’s dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:

A) $31.25

B) $40.00

C) $41.67

D) $43.33

Answer: D Difficulty: Medium Page: 145, 1st paragraph.

Po =[pic]

$41.67 = [pic]

5. ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

A) $31.16

B) $33.23

C) $37.42

D) $47.77

Answer: C Difficulty: Hard Page: 148, 2nd paragraph.

Po = [pic]

= [pic]

= $2.61 + 2.72 + 32.09

= $37.42

6. What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

A) 25.00%

B) 33.33%

C) 66.67%

D) 75.00%

Answer: C Difficulty: Medium Page: 149, 4th paragraph.

plowback = 1 - payout ratio

= 1 – [pic]

= 1 – .33

( .67

7. What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

A) $27.78

B) $30.28

C) $31.10

D) $31.39

Answer: D Difficulty: Hard Page: 145, 1st paragraph.

Po = Do + [pic]

= $2.50 + [pic]

= $2.50 + [pic]

= $2.50 + $28.89

= $31.39

8. What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?

A) 5.00%

B) 10.00%

C) 14.09%

D) 15.00%

Answer: D Difficulty: Medium Page: 145, 1st paragraph.

Expected Return = [pic]

= [pic]

= .05 + .10

= .15 = 15%

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