FIN350 ICW No. 3Stock Valuation and Cost of Capital
rs = D1 / P0 (dividend yield)
+
g (capital gain yield)
rs = rRF + (rM – rRF) β
Firm value=FCF1/(WACCg) if free cash flows grow at a constant rate
P=D1/(rsg)=D0*(1+g)/(rsg)
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 riskfree 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/(rg)=3/0.06=$50
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 Spring '07
 Chen
 Finance, Cost Of Capital, Stock Valuation, Valuation, Dividend yield

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