PRACTICE EXAM QUESTIONS ON STOCK VALUATION

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Philip Hopkins
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1 Dr. Sudhakar Raju FN 6100 PRACTICE EXAM QUESTIONS ON STOCK VALUATION 1. If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate: I. the price of the stock today II. the dividend that is expected to be paid ten years from now III. the appropriate discount rate ten years from now a. I only b. I and II only c. I and III only d. II and III only e. I, II, and III 2. Which of the following statements is true? I. The dividend growth model holds only if the dividend growth rate exceeds the stock s required return. II. An increase in the dividend growth rate will increase a stock s market value, all else the same. III. An increase in the required return on a stock will increase its market value, all else the same. a. I only b. II only c. III only d. I and III only e. I, II, and III 3. Which of the following is false regarding the differences between debt and common stock? a. Equity is ownership in a firm but debt is not. b. Stockholders have voting power while creditors usually do not. c. Periodic payments made to either class of security are tax deductible for the issuer. d. Interest payments are legally binding while dividend payments generally are not. 1

2 4. Preferred stock is much like debt in that: I. The payments on both are tax-deductible to the issuing firm. II. Neither security is protected in the event of non-payment of promised cash flows. III. Neither security participates in any unexpected profits the firm generates. a. I only b. II only c. III only d. I and II only e. I and III only 5. What would you pay for a share of ABC Corporation stock today if the dividend one year from now will be $3 per share and you can sell the stock (after you receive the dividend) for $90 a year from today. Assume your required return is 15%. a. $78.26 b. $80.87 c. $82.56 d. $90.00 e. $ The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock, after you receive the dividend, for $100 at the end of 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today? a. $75.45 b. $77.24 c. $81.52 d. $ A stock that pays a constant dividend of $1.50 forever currently sells for $ What is the required rate of return? a. 10% b. 12% c. 13% d. 14% 2

3 8. ABC Company s preferred stock is selling for $30 a share. If the required return is 8%, what will the dividend be two years from now? a. $2.00 b. $2.20 c. $2.40 d. $ What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% and you require a 12% return on your investment? a. $28.57 b. $29.33 c. $31.43 d. $43.14 e. $ The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. You are unsure about the stock s required rate of return. What will the stock sell for one year from now? a. $ b. $ c. $ d. $ e. $ Llano s stock is currently selling for $ The expected dividend one year from now is $2 and the required return is 13%. What is this firm s dividend growth rate assuming the constant dividend growth model is appropriate? a. 8% b. 9% c. 10% d. 11% 3

4 12. The current price of XYZ stock is $ Dividends are expected to grow at 5% indefinitely and the most recent dividend was $2.75. What is the required rate of return on XYZ stock? a. 7.3% b. 8.6% c. 9.5% d. 10.6% e. 11.2% 13. ABC Corporation s common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock? a. 7.3% b. 8.7% c. 9.5% d. 10.6% e. 11.2% 14. Suppose NoGro, Inc. has just issued a dividend of $3.25 per share. Subsequent dividends will remain at $3.25 indefinitely. Returns on the stock of firms like NoGro are currently running 10%. What is the value of one share of stock? a. $22.50 b. $27.25 c. $32.50 d. $37.25 e $ Suppose Pale Hose, Inc. has just paid a dividend of $1.80 per share. Sales and profits for Pale Hose are expected to grow at a rate of 8% per year. Its dividend is expected to grow by the same amount. If the required return is 14%, what is the value of a share of Pale Hose? a. $18.00 b. $25.20 c. $27.80 d. $30.60 e. $

5 16. McGonigal s Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends at the end of 3 years from today. The first dividend will be $1.50 and dividends will grow at 6% per year thereafter. Given a required return of 14%, what would you pay for the stock today? a. $13.42 b. $14.42 c. $16.37 d. $17.61 e $ McIver s Meals, Inc. currently pays a $2 annual dividend. Investors believe that dividends will grow at 20% next year, 12% annually for the two years after that, and 6% annually thereafter. Assume the required return is 10%. What is the current market price of the stock? a. $54.90 b. $60.80 c. $66.58 d. $69.30 e $ The preferred stock of the Limbaugh Institute pays a constant annual dividend of $4 and sells for $50. You believe the stock will sell for $32 in one year. You must, therefore, believe that the required return on the stock will be in one year. a. 8%; higher b. 8%; lower c. 1.50%; higher d. 2.50%; lower e 4.50%; higher 19. Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. At the end of year 31, the firm will begin a program of paying a $30 per share dividend every year The dividend will not subsequently change. Given a required return of 18%, what should the stock sell for today? a. $ 1.16 b. $ 2.09 c. $ 8.31 d. $ e $

6 20. Boomer Products, Inc. manufactures no-inhale cigarettes. As their target customers age, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required return of 10%, the stock should sell today for: a. $10.00 b. $12.67 c. $25.33 d. $28.00 e $ B 2. B 3. C 4. C 5. B 6. C 7. D 8. C 9. A 10. C 11. A 12. B 13. B 14. C 15. E 16. A 17. C 18. E 19. A 20. C ANSWER KEY 6

2) Which NYSE member is typically an employee of a brokerage company such as Merrill Lynch?

2) Which NYSE member is typically an employee of a brokerage company such as Merrill Lynch? Questions in Chapter 8 concept.qz 1) A is an owner of a seat on the New York Stock Exchange. [A] broker [B] dealer [C] member [D] floor trader [E] specialist [A] :This is an individual who arranges security