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Review Problems Exam 2 BADM 115 Fall 2008 Professor Isabelle Bajeux-Besnainou Expected dividend yield i . If D 1 = \$2.00, g (which is constant) = 6%, and P = \$40, what is the stocks expected dividend yield for the coming year? a. 5.0% b. 6.0% c. 7.0% d. 8.0% e. 9.0% Constant growth valuation ii . A stock is expected to pay a dividend of \$1 at the end of the year. The required rate of return is r s = 11%, and the expected constant growth rate is 5%. What is the current stock price? a. \$16.67 b. \$18.83 c. \$20.00 d. \$21.67 e. \$23.33 Preferred stock valuation iii . Mark Walker Inc plans to issue preferred stock with a perpetual annual dividend of \$2 per share and a par value of \$25. If the required return on this stock is currently 8%, what should be the stocks market value? a. \$22.00 b. \$23.00 c. \$24.00 d. \$25.00 e. \$26.00 Future price of a constant growth stock iv . Damon Enterprises' stock currently sells for \$25 per share. The stocks dividend is projected to increase at a constant rate of 7% per year. The required rate of return on the stock, r s , is 10%. What is Damon's expected price 4 years from today? a. \$30.21 b. \$31.65 c. \$32.77 d. \$33.89 e. \$34.45 Constant growth valuation; CAPM v . The Lashgari Company is expected to pay a dividend of \$1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price? a. \$15.00 b. \$20.00 c. \$25.00 d. \$30.00 e. \$35.00 Constant growth dividend vi . Wald Inc's stock has a required rate of return of 10%, and it sells for \$40 per share. Wald's dividend is expected to grow at a constant rate of 7% per year. What is the expected year- end dividend, D 1 ? a. \$0.90 b. \$1.00 c. \$1.10 d. \$1.20 e. \$1.30 Constant growth stock vii . Thames Inc.s most recent dividend was \$2.40 per share (D = \$2.40). The dividend is expected to grow at a rate of 6% per year. The risk-free rate is 5% and the market risk premium is 4%. If the companys beta is 1.3, what is the price of the stock today? a. \$72.14 b. \$57.14 c. \$40.00 d. \$68.06 e. \$60.57 Component cost of retained earnings: CAPM viii . Assume that you are a consultant to Thornton Inc., and you have been provided with the following data: r RF = 5.5%; RP M = 6.0%; and b = 0.8. What is the cost of equity from retained earnings based on the CAPM approach? a. 9.65% b. 9.91% c. 10.08% d. 10.30% e. 10.49% Component cost of retained earnings: DCF, D 1 ix . Assume that you are a consultant to Morton Inc., and you have been provided with the following data: D 1 = \$1.00; P = \$25.00; and g = 6% (constant). What is the cost of equity from retained earnings based on the DCF approach? a. 9.79% b. 9.86% c. 10.00% d. 10.20% e. 10.33% Cost of retained earnings: bond-yield-plus-risk premium x . P. Daves Inc. hired you as a consultant to help them estimate their cost of equity. The ... View Full Document

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