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Ch9&10 Exercise

# Ch9&10 Exercise - FIN350 ICW No 3-Stock Valuation and...

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FIN350 ICW No. 3-Stock Valuation and Cost of Capital rs = D1 / P0 (dividend yield) + g (capital gain yield) rs = rRF + (rM – rRF) β Firm value=FCF1/(WACC-g) if free cash flows grow at a constant rate P=D1/(rs-g)=D0*(1+g)/(rs-g) 1.According to the dividend discount model, the current value of a stock is equal to the: A) present value of all expected future dividends. B) sum of all future expected dividends. C) next expected dividend, discounted to the present. D) discounted value of all dividends growing at a risk-free rate. E) none of the above 2. The PDQ Company’s common stock is expected to pay a \$3.00 dividend in the coming year. If investors require a 10% return and the growth rate in dividends is expected to be -5% (negative 5%), what will the market price of the stock be? 3. If a firm will produce the following constant growth free cashflows: FCF1=\$10m at end of year 1, FCF2=\$11m at the end of year 2, and so on with the growth rate g= 10%. If the weighted average cost of capital for the whole firm is 15% and the market value of debt is \$20 million and there are 1 million shares of common stock outstanding, how much is the per share stock value? 4. The stock of MTY Golf World has a constant dividend growth rate of 6% and just paid a dividend of \$5.09. If the required rate of return is 12%, what is the current stock price? AAEB 1

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5. The price of a stock will likely increase if: A) the investment horizon increases. B) the growth rate of dividends increases. C) the discount rate increases. D) dividends are discounted back to the present. 6.If a stock’s P/E ratio is 14 at a time when earnings are \$3 per year, what is the stock’s current price? P/E = 14 Then P = 14 x \$3 Price = \$42 7. How much should you pay for a share of stock now that offers a constant dividend growth rate of 10%, has a discount rate of 16%, and pays a dividend of \$3 per share next year ? P0=C1/(r-g)=3/0.06=\$50
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Ch9&10 Exercise - FIN350 ICW No 3-Stock Valuation and...

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