Problem Review Set Stock Valuation

8/11/2019 Problem Review Set Stock Valuation

1/5

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. True

b. 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 euilibrium.

a. True

b. False

3.)

!tock " has a reuired return of #$% and a price of &'(, and its

dividend is expected to grow at a constant rate of )% per year. !tock *

has a reuired return of #'% and a price of &+$, and its dividend is

expected to grow at a constant rate of % per year. -hich of the

following statements is C//0CT1

a. If the stock market were efficient, these two stocks would have the same

price.

b. The two stocks have the same dividend yield.

c. If the stock market were efficient, these two stocks would have the same

expected return.d. The two stocks have the same expected capital gains yield.

e. The two stocks have the same expected year2end dividend.

4.)

!tocks " and * have the same price, but !tock " has the higher reuired

rate of return. -hich of the following statements is C//0CT1

a. If !tock " has a lower dividend yield than !tock *, its expected capital

gains yield must be higher than !tock *3s.

b. !tock * must have a higher dividend yield than !tock ".

c. !tock " must have a higher dividend yield than !tock *.

d. If !tock " has a higher dividend yield than !tock *, its expected

capital gains yield must be lower than !tock *3s.

e. !tock " must have both a higher dividend yield and a higher capital

gains yield than !tock *.


2/5

5.)

" stock is expected to pay a year2end dividend of &'.$$, i.e., D#4

&'.$$. The dividend is expected to decline at a rate of (% a year

forever 5g 4 2(%6. If the company3s expected and reuired rate of

return is #(%, which of the following statements is C//0CT1

a. The company3s current stock price is &'$.

b. The company3s dividend yield ( years from now is expected to be #$%.

c. The constant growth model cannot be used because the growth rate is

negative.

d. The company3s expected capital gains yield is (%.

e. The company3s stock price next year is expected to be &.($.

.)

!tocks 7 and 8 sell at the same price. !tock 7 has a reuired return of

#'% while 89s reuired return is #$%. !tock 73s dividend is expected to

grow at a constant rate of :% a year, while !tock 83s dividend is

expected to grow at a constant rate of +%. If the market is in

euilibrium so that expected returns eual reuired returns, which of

the following statements is C//0CT1

a. !tock 7 has a higher dividend yield than !tock 8.

b. !tock 8 has a higher dividend yield than !tock 7.

c. ne year from now, !tock 73s price is expected to be higher than !tock

83s price.

d. !tock 7 has the higher expected year2end dividend.

e. !tock 8 has a higher capital gains yield.

!.)

The expected return on ;ortheast Corporation3s stock is #+%. The stock3s

dividend is expected to grow at a constant rate of


3/5

#.)

" stock is expected to pay a dividend of &$.)( at the end of the year.

The reuired rate of return is rs4 #'.(%, and the expected constant

growth rate is g 4


4/5

13.)

Aoode Inc.9s stock has a reuired rate of return of ##.($%, and it sells

for &'(.$$ per share. Aoode9s dividend is expected to grow at a constant

rate of ).$$% per year. -hat was Aoode9s last dividend, D$1

a. &$.(b. .$(

c. .#:

d. .')

e. .+$

14.)

8ou must estimate the intrinsic value of Tsetseko Technologies3 stock.

Tsetseko9s end2of2year free cash flow 5FCF6 is expected to be ).($

million, and it is expected to grow at a constant rate of ).$$% a year

thereafter. The company3s -"CC is #$.$$%. Tsetseko has '(.$$ million

of long2term debt plus preferred stock, and there are #(.$$ million

shares of common stock outstanding. -hat is Tsetseko9s estimated

intrinsic value per share of common stock1

a. &'


5/5

Solution%

1.) a

2.) b

3.) b4.) a

5.) e.) c

!.) &

".) b

#.) c

1$.) &

11.) e

12.) a

13.) b

14.) c

15.) e

1.) b

Problem Review Set Stock Valuation

Documents

Transcript of Problem Review Set Stock Valuation