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Chapter11 Practice problem

# Chapter11 Practice problem - FRL 315 Chapter 11 Practice...

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FRL 315 Chapter 11 Practice Problems 1. The common price-earnings valuation method applied the ______ price-earnings ratio to ________ earnings per share in order to value the firm’s stock. A) firm’s; industry B) firm’s; firm’s C) average industry; industry D) average industry; firm’s 2. A firm is expected to generate earnings of \$2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm’s shares based on the price-earnings (PE) method is 3. Bolwork Inc. is expected to pay a dividend of \$5 per share next year. Bolwork’s dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is \$_______ per share. 4. Hancock Inc. retains most of its earnings. The company currently has earnings per share of \$11. Hancock expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Hancock’s industry is 12. Hancock is expected to pay dividends per share of \$3.50 during each of the next three years. If investors require a 10 percent rate of return on Hancock stock, a fair price for Hancock stock today is \$________.

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