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Exam 9: Stocks and Their Valuation

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Question 41

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Molen Inc.has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.If the required return on this preferred stock is 6.5%,at what price should the stock sell?

A) $104.27
B) $106.95
C) $109.69
D) $112.50
E) $115.38

F) B) and D)
G) A) and B)

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Question 42

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For a stock to be in equilibrium,that is,for there to be no long-term pressure for its price to depart from its current level,then

A) the expected future return must be less than the most recent past realized return.
B) the past realized return must be equal to the expected return during the same period.
C) the required return must equal the realized return in all periods.
D) the expected return must be equal to both the required future return and the past realized return.
E) the expected future return must be equal to the required return.

F) A) and D)
G) A) and C)

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Question 43

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Agarwal Technologies was founded 10 years ago.It has been profitable for the last 5 years,but it has needed all of its earnings to support growth and thus has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value? ​

Reddick Enterprises' stock currently sells for $35.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Francis Inc.'s stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Which of the following statements is CORRECT,assuming stocks are in equilibrium?

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

If D₀ = $1.75,g (which is constant) = 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

For a stock to be in equilibrium,two conditions are necessary: (1)The stock's market price must equal its intrinsic value as seen by the marginal investor and (2)the expected return as seen by the marginal investor must equal this investor's required return.

Huang Company's last dividend was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Wall Inc.forecasts that it will have the free cash flows (in millions) shown below.If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3,what is the firm's total corporate value,in millions? ​

Based on the corporate valuation model,Wang Inc.'s total corporate value is $750 million.Its balance sheet shows $100 million notes payable,$200 million of long-term debt,$40 million of common stock (par plus paid-in-capital) ,and $160 million of retained earnings.What is the best estimate for the firm's value of equity,in millions?

You have been assigned the task of using the corporate,or free cash flow,model to estimate Petry Corporation's intrinsic value.The firm's WACC is 10.00%,its end-of-year free cash flow (FCF₁) is expected to be $75.0 million,the FCFs are expected to grow at a constant rate of 5.00% a year in the future,the company has $200 million of long-term debt and preferred stock,and it has 30 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Church Inc.is presently enjoying relatively high growth because of a surge in the demand for its new product.Management expects earnings and dividends to grow at a rate of 25% for the next 4 years,after which competition will probably reduce the growth rate in earnings and dividends to zero,i.e.,g = 0.The company's last dividend,D₀,was $1.25,its beta is 1.20,the market risk premium is 5.50%,and the risk-free rate is 3.00%.What is the current price of the common stock?

Kedia Inc.forecasts a negative free cash flow for the coming year,FCF₁ = −$10 million,but it expects positive numbers thereafter,with FCF₂ = $25 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14.0%,what is the firm's total corporate value,in millions?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Sorenson Corp.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Sorenson's expected stock price in 7 years,i.e.,what is ?

Based on the corporate valuation model,the total corporate value of Chen Lin Inc.is $900 million.Its balance sheet shows $110 million in notes payable,$90 million in long-term debt,$20 million in preferred stock,$140 million in retained earnings,and $280 million in total common equity.If the company has 25 million shares of stock outstanding,what is the best estimate of its stock price per share?

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

Preferred stock is a hybrid: a sort of cross between a common stock and a bond: in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.