Chapter 08

Valuing Stocks

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BA 540 Chapter 08 – Valuing Stocks

BA540 Chapter 08 – Valuing Stocks

BA-540 Chapter 08 – Valuing Stocks

BA 540 Chapter08 – Valuing Stocks

Multiple Choice Questions

1. These investors earn returns from receiving dividends and from stock price appreciation.

A. bondholders

B. stockholders

C. investment bankers

D. managers

2. As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims.

A. creditors

B. bondholders

C. preferred stockholders

D. common stockholders

3. When residual cash flows are high, stock values will be

A. unchanged.

B. low.

C. high.

D. unpredictable.

4. Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place

A. at dealers’ trading posts.

B. at brokers’ trading posts.

C. at dealers’ computers.

D. at market markers.

5. The Dow Jones Industrial Average (DJIA) includes

A. all of the stock listed on the New York Stock Exchange.

B. 30 of the largest (market capitalization) and most active companies in the U.S. economy.

C. 500 firms that are the largest in their respective economic sectors.

D. 500 firms that are the largest as ranked by Fortune Magazine.

6. The Standard & Poor’s 500 Index includes

A. all of the stock listed on the New York Stock Exchange.

B. 30 of the largest (market capitalization) and most active companies in the U.S. economy.

C. 500 firms that are the largest in their respective economic sectors.

D. 500 firms that are the largest as ranked by Fortune Magazine.

7. The NASDAQ Composite includes

A. all of the stocks listed on the NASDAQ Stock Exchange.

B. 30 of the largest (market capitalization) and most active companies in the U.S. economy.

C. 500 firms that are the largest in their respective economic sectors.

D. 500 firms that are the largest as ranked by Fortune Magazine.

8. This will only be executed if the order’s price conditions are met.

A. a trade

B. a limit order

C. an unlimited order

D. a spread

9. Investors buy stock at the

A. dealer price.

B. bid price.

C. quoted ask price.

D. broker price.

10. Investors sell stock at the

A. dealer price.

B. bid price.

C. quoted ask price.

D. broker price.

11. These are valued as a special zero-growth case of the constant growth rate model.

A. common stock

B. preferred stock

C. future dividends

D. future stock prices

12. Stock valuation model dynamics make clear that lower discount rates lead to

A. lower valuations.

B. higher valuations.

C. lower growth rates.

D. higher growth rates.

13. Stock valuation model dynamics make clear that higher growth rates lead to

A. lower valuations.

B. higher valuations.

C. lower growth rates continuing.

D. higher growth rates continuing.

14. We can estimate a stock’s value by

A. using the book value of the total stockholder equity section.

B. discounting the future dividends and future stock price appreciation.

C. compounding the past dividends and past stock price appreciation.

D. using the book value of the total assets divided by the number of shares outstanding.

15. Many companies grow very fast at first, but slower future growth can be expected. Such companies are called

A. Fortune 500 companies

B. Blue Chip companies

C. Variable Growth Rate firms

D. Constant Growth Rate firms

16. We often use the P/E ratio model with the firm’s growth rate to estimate

A. required rates of return.

B. inflation.

C. a stock’s current price.

D. a stock’s future price.

17. Value stocks usually have

A. low P/E ratios and high growth rates.

B. high P/E ratios and low growth rates.

C. low P/E ratios and low growth rates.

D. high P/E ratios and high growth rates.

18. Dividend yield is defined as

A. the last four quarters of dividend income expressed as a percentage of the par value of the stock.

B. the last four quarters of dividend income expressed as a percentage of the current stock price.

C. the last dividend paid expressed as a percentage of the current stock price.

D. the next dividend to be paid expressed as a percentage of the current stock price.

19. The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm’s

A. market capitalization.

B. book value.

C. market makers.

D. constant growth model.

20. Stock Index Performance On November 26, 2007, The Dow Jones Industrial Average closed at 12,743.40, which was down 237.44 that day. What was the return (in percent) of the stock market that day?

A. -.02%

B. +.02%

C. -1.83

D. +1.83%

21. Stock Index Performance On November 27, 2007, The Dow Jones Industrial Average closed at 12,958.44, which was up 215.04 that day. What was the return (in percent) of the stock market that day?

A. -.017%

B. +.017%

C. -1.69%

D. +1.69

22. Buying Stock with Commission At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL), which trades at $85.13?

A. $8,503.05

B. $8,503.00

C. $8,522.95

D. $9,508.00

23. Buying Stock with Commission At your discount brokerage firm, it costs $8.50 per stock trade. How much money do you need to buy 200 shares of Apple (AAPL), which trades at $171.54?

A. $32,608.00

B. $34,299.50

C. $34,316.50

D. $36,008.00

24. Selling Stock with Commissions At your full-service brokerage firm, it costs $110 per stock trade. How much money do you receive after selling 100 shares of Time Warner, Inc. (TMX), which trades at $22.62?

A. $2,152.00

B. $2,262.00

C. $2,372.00

D. $2,388.20

25. Selling Stock with Commissions At your full-service brokerage firm, it costs $120 per stock trade. How much money do you receive after selling 200 shares of Ralph Lauren (RL), which trades at $85.13?

A. $16,546.00

B. $16,906.00

C. $17,026.00

D. $17,146.00

26. Buying Stock with a Market Order You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24, respectively. You place a market buy-order for 100 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A. $7.00

B. $9,617.00

C. $9,624.00

D. $19,241.00

27. Buying Stock with a Market Order You would like to buy shares of Nokia (NOK). The current bid and ask quotes are $20.13 and $20.15, respectively. You place a market buy-order for 300 shares that executes at these quoted prices. How much money did it cost to buy these shares?

A. $6.00

B. $6,039.00

C. $6,045.00

D. $12,084.00

28. Selling Stock with a Limit Order You would like to sell 100 shares of Pfizer, Inc. (PFE). The current bid and ask quotes are $27.22 and $27.25, respectively. You place a limit sell-order at $27.24. If the trade executes, how much money do you receive from the buyer?

A. $2,722.00

B. $2,724.00

C. $2,725.00

D. $5,446.00

29. Selling Stock with a Limit Order You would like to sell 400 shares of International Business Machines (IBM). The current bid and ask quotes are $96.24 and $96.17, respectively. You place a limit sell-order at $96.20. If the trade executes, how much money do you receive from the buyer?

A. $38,464.00

B. $38,468.00

C. $38,480.00

D. $38,496.00

30. Value of a Preferred Stock If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 7 percent, what’s the value of the stock?

A. $0.21

B. $0.43

C. $21.00

D. $42.86

31. Value of a Preferred Stock If a preferred stock from Ecology and Environment, Inc. (EEI) pays $2.50 in annual dividends, and the required return on the preferred stock is 5.8 percent, what’s the value of the stock?

A. $0.15

B. $0.43

C. $14.50

D. $43.10

32. P/E Ratio and Stock Price International Business Machines (IBM) has earnings per share of $6.85 and a P/E ratio of 15.19. What is the stock price?

A. $0.45

B. $2.22

C. $45.09

D. $104.05

33. P/E Ratio and Stock Price Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?

A. $0.19

B. $5.27

C. $18.97

D. $23.03

34. P/E Ratio and Stock Price Ralph Lauren (RL) has earnings per share of $3.85 and a P/E ratio of 17.37. What is the stock price?

A. $0.22

B. $4.51

C. $22.16

D. $66.87

35. Value of Dividends and Future Price A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

A. $65.40

B. $66.67

C. $65.57

D. $79.14

36. Value of Dividends and Future Price A firm is expected to pay a dividend of $3.00 next year and $3.21 the following year. Financial analysts believe the stock will be at their target price of $80.00 in two years. Compute the value of this stock with a required return of 13 percent.

A. $50.00

B. $67.52

C. $67.82

D. $86.21

37. Dividend Growth Annual dividends of Wal-Mart Stores (WMT) grew from $0.23 in 2000 to $0.83 in 2007. What was the annual growth rate?

A. 2.61%

B. 20.12%

C. 37.29%

D. 260.87%

38. Dividend Growth Annual dividends of Pfizer, Inc. (PFE) grew from $0.38 in 2000 to $1.15 in 2007. What was the annual growth rate?

A. 2.02%

B. 17.14%

C. 28.95%

D. 202.63%

39. Value a Constant Growth Stock Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.49. What is the value of their stock when the required rate of return is 14.13 percent?

A. $3.92

B. $4.90

C. $43.36

D. $49.00

40. Value a Constant Growth Stock Financial analysts forecast Target Corp (TGT) growth for the future to be 11 percent. Their recent dividend was $0.52. What is the value of their stock when the required rate of return is 11.89 percent?

A. $5.25

B. $6.48

C. $58.43

D. $64.85

41. Expected Return American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 15.5 percent rate. At the current stock price of $24.07, what is the return shareholders are expecting?

A. 15.50%

B. 15.52%

C. 17.08%

D. 17.32%

42. Expected Return The Buckle (BKE) recently paid a $0.90 dividend. The dividend is expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the return shareholders are expecting?

A. 19.00%

B. 19.02%

C. 21.48%

D. 22.74%

43. Expected Return Home Depot (HD) recently paid a $0.90 dividend. The dividend is expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the return shareholders are expecting?

A. 2.70%

B. 17.03%

C. 17.18%

D. 20.18%

44. Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in 2 years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

A. $4.42

B. $4.59

C. $5.43

D. $7.21

45. Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.15 per share in 3 years. This dividend will grow at 9 percent indefinitely. Using a 10 percent discount rate, compute the value of this stock.

A. $12.28

B. $12.40

C. $16.35

D. $16.50

46. P/E Ratio Model and Future Price Walmart (WMT) recently earned a profit of $3.13 per share and has a P/E ratio of 14.22. The dividend has been growing at a 12.5 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 10 in five years.

A. $6.08, $5.04 respectively

B. $72.22, $50.40 respectively

C. $80.20, $56.40 respectively

D. $86.46, $60.80 respectively

47. P/E Ratio Model and Future Price Target Corp (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in five years.

A. $118.85, $158.01 respectively

B. $137.19, $182.39 respectively

C. $173.87, $231.15 respectively

D. $308.81, $410.55 respectively

48. Value of Future Cash Flows A firm recently paid a $1.00 annual dividend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is expected to be $100. If the required rate for this stock is 14 percent, what is its value?

A. $25.00

B. $36.60

C. $62.87

D. $72.30

49. Value of Future Cash Flows A firm recently paid a $0.30 annual dividend. The dividend is expected to increase by 8 percent in each of the next four years. In the fourth year, the stock price is expected to be $60. If the required rate for this stock is 10 percent, what is its value?

A. $15.00

B. $20.41

C. $42.13

D. $45.30

50. Constant Growth Stock Valuation Best Buy Co (BBY) paid a $0.27 dividend per share in 2003, which grew to $0.49 in 2007. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required rate of return is 17.23 percent?

A. $2.84

B. $42.24

C. $49.03

D. $50.78

51. Constant Growth Stock Valuation Target Corp (TGT) paid a $0.21 dividend per share in 2000, which grew to $0.52 in 2007. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required rate of return is 14.77 percent?

A. $3.52

B. $55.32

C. $62.97

D. $63.49

52. Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 14 percent required rate. The firm recently paid a $1.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12 percent rate. How much should the stock price change (in dollars and percentage)?

A. $25, 1%

B. $25, 100%

C. $28.50, 1.04%

D. $28.50, 104%

53. Changes in Growth and Stock Valuation Consider a firm that had been priced using a 6 percent growth rate and a 9 percent required rate. The firm recently paid a $0.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at an 8 percent rate. How much should the stock price change (in dollars and percentage)?

A. $33.33, 67%

B. $33.33, 198%

C. $36.33, 67%

D. $36.33, 206%

54. Variable Growth A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 15 percent discount rate is appropriate for this stock, what is its value?

A. $5.00

B. $22.62

C. $25.75

D. $36.46

55. Variable Growth A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 8 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

A. $12.50

B. $75.93

C. $83.13

D. $120.24

56. P/E Model and Cash Flow Valuation Suppose that a firm’s recent earnings per share and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at 10 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A. $31.68

B. $40.15

C. $46.89

D. $60.00

57. P/E Model and Cash Flow Valuation Suppose that a firm’s recent earnings per share and dividends per share are $2.50 and $1.00, respectively. Both are expected to grow at 10 percent. However, the firm’s current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

A. $37.51

B. $37.64

C. $42.14

D. $72.47

58. At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 200 shares of General Electric (GE), which trades at $45.19?

A. $9,038.00

B. $4528.95

C. $9,047.95

D. $4,595.95

59. At your discount brokerage firm, it costs $7.95 per stock trade. How much money do you receive after selling 250 shares of General Electric (GE), which trades at $55.19?

A. $14,037.95

B. $11,958.55

C. $12,174.95

D. $13,789.55

60. A preferred stock from DLC pays $3.00 in annual dividends. If the required return on the preferred stock is 9.3%, what is the value of the stock?

A. $34.89

B. $32.26

C. $38.49

D. $31.13

61. Ultra Petroleum (UPL) has earnings per share of $1.75 and P/E of 42.56. What is the stock price?

A. $74.48

B. $76.68

C. $85.68

D. $112.98

62. JPM has earnings per share of $3.75 and P/E of 47. What is the stock price?

A. $174.08

B. $176.25

C. $185.95

D. $112.98

63. A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year. Financial analysts believe the stock will be at their price target of $125.00 in two years. Compute the value of this stock with a required rate of return of 15%.

A. $78.34

B. $81.05

C. $87.13

D. $99.09

64. Financial analysts forecast ABC Inc. growth for the future to be 12%. ABC’s recent dividend was $1.60. What is the value of ABC stock when the required return is 15%?

A. $59.73

B. $63.72

C. $79.81

D. $91.02

65. A fast growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a rate of 30% rate for the next 4 years. Afterwards, a more stable 7% growth rate can be assumed. If a 10% discount rate is appropriate for this stock, what is its value?

A. $60.48

B. $60.18

C. $61.34

D. $73.86

66. A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15% rate for the next 3 years. Afterwards, a more stable 6% growth rate can be assumed. If a 10% discount rate is appropriate for this stock, what is its value?

A. $33.54

B. $37.99

C. $39.37

D. $42.03

67. A firm recently paid a $0.50 annual dividend. The dividend is expected to increase by 10% in each of the next three years. In the third year, the stock price is expected to be $110. If the required return is 15%, what is its value?

A. $62.53

B. $68.95

C. $73.71

D. $78.67

68. Campbell Soup Co paid a $1.55 dividend per share in 2004, which grew to $1.95 in 2009. This growth is expected to continue. What is the value of this stock at the beginning of 2010 when the required return is 10.5 percent?

A. $35.20

B. $34.16

C. $33.48

D. $32.17

69. Consider a firm that had been priced using a 12 percent growth rate and a 16 percent required return. The firm recently paid a $5.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate. How much should the stock price change (in dollars and percentage)?

A. $21.50; 13.72%

B. $21.50; 16.14%

C. $20.71; 14.79%

D. $20.71; 19.93%

70. Suppose that a firm’s recent earnings per share and dividend per share are $2.50 and $1.00, respectively. Both are expected to grow at 5 percent. However, the firm’s current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years. Compute a value for this stock. Assume a 10 percent required rate.

A. $36.19

B. $38.86

C. $40.31

D. $42.00

71. A firm has been losing sales due to technological obsolescence. It projects growth for the future to be -2%. Its recent divided was $2.00. What is the value of this stock when the required return is 9%?

A. $28.00

B. $29.14

C. $17.82

D. $15.52

72. A firm has been losing sales due to technological obsolescence. It projects growth for the future to be -3%. Its recent divided was $2.50. What is the value of this stock when the required return is 7%?

A. $28.17

B. $24.25

C. $17.42

D. $15.53

73. To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________.

A. Firm size

B. Total number of stockholders

C. Level of trading volume

D. P/E Ratio

74. Which of the following is an electronic stock market without a physical trading floor?

A. American Stock Exchange

B. Mercantile Exchange

C. New York Stock Exchange

D. Nasdaq Stock Market

75. Individuals who use their own stock inventory and capital to buy and sell the stocks they represent are called _________________.

A. Market makers

B. Brokers

C. Investors

D. None of these.

76. All of the following are stock market indices except _________________.

A. Standard & Poor’s 500 Index

B. Dow Jones Industrial Average

C. Nasdaq Composite Index

D. Mercantile 1000

77. GEN has 10 million shares outstanding and a stock price of $89.25. What is GEN’s market capitalization?

A. $89,250,000,000

B. $89,250,000

C. $892,500,000

D. $892,500

78. GEN has 1 million shares outstanding and a P/E ratio of 12. Its earnings per share is $2.00 What is GEN’s market capitalization?

A. $24,000,000

B. $12,000,000

C. $2,000,000

D. $96,000,000

79. GEN has 3 million shares outstanding and a P/E ratio of 15. Its earnings per share is $3.00 What is GEN’s market capitalization?

A. $45,000,000

B. $135,000,000

C. $112,000,000

D. $9,000,000

80. ABC has a net profit margin of 3.3% on Sales of $10,000,000. The firm has 50,000 shares outstanding. If the firm’s P/E is 19 times, how much is the stock selling for?

A. $41.72

B. $34.96

C. $125.40

D. $99.16

81. ABC has a net profit margin of 4.3% on Sales of $12,000,000. The firm has 250,000 shares outstanding. If the firm’s P/E is 16 times, how much is the stock selling for?

A. $41.72

B. $35.96

C. $25.40

D. $33.02

82. Which of the following indices best reflects the ten sectors of the economy?

A. Nasdaq Composite

B. Dow Jones Industrial Average

C. Standard & Poor’s 500

D. None of these.

83. Studies of investor psychology have discovered that ____________.

A. investors tend to trade too much

B. investors tend to sell their winners too soon

C. investors tend to become overconfident

D. All of these.

84. Sally has researched GLE and wants to pay no more than $50 for the stock. Currently, GLE is trading in the market for $54. Sally would be best served to:

A. buy using a limit order.

B. buy using a market order.

C. use the bid-ask spread to her advantage.

D. None of these.

85. Which of the following is incorrect with respect to limit orders?

A. They can be used only to buy stock.

B. If the current quote does not meet the price cited in the limit order, the trade is not executed.

C. The advantage of the limit order is that the investor makes the trade at the desired price.

D. The disadvantage of the limit order is that the trade might not be executed at all.

86. Which of the following is incorrect with respect to preferred stock?

A. Preferred stock is largely owned by other companies rather than individual investors.

B. Preferred stock takes preference over common stock in bankruptcy proceedings.

C. Preferred stock dividends do not grow.

D. All of these statements are correct.

87. JUJU’s dividend next year is expected to be $1.50. It is trading at $45 and is expected to grow at 9% per year. What is JUJU’s dividend yield and capital gain?

A. 1.5%; 6%

B. 9%; 3.33%

C. 3.33%; 9%

D. 6%; 1.5%

88. JUJU’s dividend next year is expected to be $5.50. It is trading at $45 and is expected to grow at 4% per year. What is JUJU’s dividend yield and capital gain?

A. 2.5%; 6%

B. 12.22%; 4%

C. 4%; 12.22%

D. 6%; 2.5%

89. Value stocks are _________________________.

A. stocks that are expected to exhibit high growth

B. stocks that have low P/E ratios and are selling at a bargain price

C. stocks that have high valuation ratios, such as P/E

D. None of these.

90. A firm does not pay any dividends at this point in time. Which valuation method should be used on this stock?

A. Residual Claimant Model

B. Variable Growth Model

C. P/E Ratio Model

D. Capital Gain Model

91. Which of the following statements is incorrect?

A. Trading at the New York Stock Exchange and the American Stock Exchange are done by open outcry.

B. Dealers create market liquidity in the Nasdaq’s electronic market.

C. The Dow Jones Industrial Average includes 35 of the largest companies in the U.S.

D. The Nasdaq contains many very large technology firms.

92. A firm is expected to pay a $4.00 dividend per share. The stock is selling in the market place for $55.00 per share. If investors are demanding 12% on this stock, what is this stock’s growth rate?

A. 4.73%

B. 7.25%

C. 5.91%

D. 6.14%

93. A firm is expected to pay a $2.00 dividend per share. The stock is selling in the market place for $50.00 per share. If investors are demanding 10% on this stock, what is this stock’s growth rate?

A. 4.73%

B. 5.92%

C. 6.00%

D. 7.29%

94. A firm’s recent dividend was $2.00 per share. The stock is selling in the market place for $50.00 per share. If investors are demanding 10% on this stock, what is this stock’s growth rate?

A. 4.73%

B. 5.92%

C. 6.00%

D. 5.77%

95. A firm’s recent dividend was $4.00 per share. The stock is selling in the market place for $55.00 per share. If investors are demanding 12% on this stock, what is this stock’s growth rate?

A. 4.73%

B. 4.41%

C. 5.91%

D. 6.14%

96. A stock is expected to pay a $1.00 dividend per share. The growth rate is expected to be 4%. If investors demand 10% on this stock, what is the expected price of the stock 10 years from now?

A. $24.68

B. $22.17

C. $25.00

D. $26.93

97. A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be 5%. If investors demand 10% on this stock, what is the expected price of the stock 10 years from now?

A. $94.68

B. $92.17

C. $130.31

D. $126.93

98. A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be -1%. If investors demand 8% on this stock, what is the expected price of the stock 3 years from now?

A. $54.68

B. $52.17

C. $41.06

D. $43.12

99. A stock is expected to pay a $5.00 dividend per share. The growth rate is expected to be -2%. If investors demand 8% on this stock, what is the expected price of the stock 5 years from now?

A. $54.68

B. $45.20

C. $41.06

D. $53.12

100. A firm’s stock is selling at $95.00 per share. Its growth rate is 10% and investors demand 15% on this stock. What is the firm’s expected dividend?

A. $4.75

B. $5.95

C. $6.25

D. $5.50

101. A firm’s stock is selling at $75.00 per share. Its growth rate is 10% and investors demand 17% on this stock. What is the firm’s expected dividend?

A. $4.75

B. $5.95

C. $6.25

D. $5.25

102. Which of the following statements is incorrect?

A. Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices.

B. Common stock price changes with the value of the company’s underlying business.

C. Preferred stockholders have higher precedence for payment in the event of firm liquidation from bankruptcy.

D. All of these statements are correct.

103. A stock recently paid a dividend of $3 per share. Its growth rate is expected to be 8%. Investors require a 10% return. The stock is selling in the market for $140. What is this stock worth and is the stock undervalued or overvalued?

A. $162; undervalued

B. $162; overvalued

C. $150; undervalued

D. $150; overvalued

104. A stock recently paid a dividend of $2.5 per share. Its growth rate is expected to be 8%. Investors require a 10% return. The stock is selling in the market for $150. What is this stock worth and is the stock undervalued or overvalued?

A. $125; undervalued

B. $125; overvalued

C. $135; undervalued

D. $135; overvalued

105. Laura is considering two investments: Stock A and B. Both stocks have a P/E ratio of 19. Stock A has an expected growth rate of 5% and stock B has an expected growth rate of 13%. Which is the better stock and why?

A. Stock B is better because it is considered to be cheaper than Stock A.

B. Stock A is better because it is expected to grow at a slower rate and therefore will be less risky than Stock B.

C. Since the P/E ratios are the same, Laura would be indifferent between the two stocks.

D. None of these statements is correct.

106. Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the difference in price if Coca-Cola is expected to grow at 6% versus 8%?

A. $18

B. $48

C. $28

D. $38

107. Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the difference in price if Coca-Cola is expected to grow at 7% versus 8%?

A. $11.40

B. $16.80

C. $21.60

D. $19.40

108. Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7% versus 8%?

A. 31.29%

B. 19.82%

C. 21.60%

D. 26.17%

Essay Questions

109. Explain how the difference in the bid and ask prices might be considered a hidden cost to the investor.

110. What ten sectors of the economy are represented in the S&P 500 Index?

111. When might the constant growth model not be used?

112. Explain the characteristics of preferred stock.

113. Explain how stock is valued if the constant growth model cannot be used.

114. Under what conditions would the constant-growth-rate model not be appropriate?

115. What are the differences between common stock and preferred stock?

116. Explain how it is possible for the Dow Jones Industrial Average and the Nasdaq Composite to move in different directions in one day.

117. Consider two firms with the same P/E ratio. Explain how one could be described as expensive compared to the other.

118. Explain how important a firm’s growth is by creating an example of a growth and no-growth stock.

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