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 P0 = $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
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 (D0 = $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 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; P0 = $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
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