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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