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Fin 335 CH 9

Fin 335 CH 9 - CHAPTER 9 STOCKS AND THEIR...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) PART I – New and Revised Carryover Problems and Questions Multiple Choice: Problems Expected dividend yield Answer: a EASY 1 . If D 1 = \$2.00, g (which is constant) = 6%, and P 0 = \$40, what is the stock’s expected dividend yield for the coming year? a. 5.0% b. 6.0% c. 7.0% d. 8.0% e. 9.0% Expected dividend yield Answer: c EASY 2 . If D 0 = \$2.00, g (which is constant) = 6%, and P 0 = \$40, what is the stock’s expected dividend yield for the coming year? a. 5.0% b. 5.1% c. 5.3% d. 5.6% e. 5.8% Expected return, dividend yield, and capital gains yield Answer: e EASY 3 . If D 1 = \$2.00, g (which is constant) = 6%, and P 0 = \$40, what is the stock’s expected capital gains yield for the coming year? a. 5.2% b. 5.4% c. 5.6% d. 5.8% e. 6.0% Expected total return Answer: b EASY 4 . If D 1 = \$2.00, g (which is constant) = 6%, and P 0 = \$40, what is the stock’s expected total return for the coming year? a. 10.8% b. 11.0% c. 11.2% d. 11.4% e. 11.6% Chapter 9: Stocks and Their Valuation Page 233 CHAPTER 9 STOCKS AND THEIR VALUATION

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Expected total return Answer: d EASY 5 . If D 0 = \$2.00, g (which is constant) = 6%, and P 0 = \$40, what is the stock’s expected total return for the coming year? a. 9.8% b. 10.3% c. 10.8% d. 11.3% e. 11.8% Constant growth valuation Answer: a EASY 6 . 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 Constant growth valuation Answer: b EASY 7 . A stock just paid a dividend of \$1. The required rate of return is r s = 11%, and the constant growth rate is 5%. What is the current stock price? a. \$15.00 b. \$17.50 c. \$20.00 d. \$22.50 e. \$25.00 Preferred stock valuation Answer: d EASY 8 . 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 stock’s market value? a. \$22.00 b. \$23.00 c. \$24.00 d. \$25.00 e. \$26.00 Page 234 Chapter 9: Stocks and Their Valuation
Constant growth stock price Answer: e EASY 9 . A share of common stock has just paid a dividend of \$2.00. If the expected long-run growth rate for this stock is 7%, and if investors require a(n) 11% rate of return, what is the price of the stock? a. \$47.50 b. \$49.00 c. \$50.50 d. \$52.00 e. \$53.50 Constant growth rate Answer: b EASY 10 . Hahn Manufacturing is expected to pay a dividend of \$1.00 per share at the end of the year (D 1 = \$1.00). The stock sells for \$40 per share, and its required rate of return is 11%. The dividend is expected to grow at a constant rate, g, forever. What is Hahn's expected growth rate? a. 8.00% b. 8.50% c. 9.00% d. 9.50% e. 10.00% Future price of a constant growth stock Answer: c EASY 11 . Damon Enterprises' stock currently sells for \$25 per share. The stock’s 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 Future price of a constant growth stock Answer: e EASY 12 . P. Daves Inc's stock is currently sells for \$45 per share. The stock’s dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, r s , is 12%. What is Daves' expected price 6 years from now?

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