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Review Problems – Exam 2 –
BADM 115 – Fall 2008 – Professor Isabelle BajeuxBesnainou
Expected dividend yield
i
.
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%
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 stock’s 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 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
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View Full DocumentConstant 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 riskfree 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
0
= $2.40). The dividend is
expected to grow at a rate of 6% per year.
The riskfree rate is 5% and the market risk
premium is 4%. If the company’s 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
0
= $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: bondyieldplusrisk premium
x
.
P. Daves Inc. hired you as a consultant to help them estimate their cost of equity.
The
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 Fall '08
 Bajeux
 Management

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