350i3stockcocn

# 350i3stockcocn - FIN350 ICW No. 3-Stock Valuation and Cost...

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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? a. \$20.00 b. \$40.00 c. \$30.00 d. \$60.00 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? a. \$20.00 b. \$30.00 c. \$80.00 d. \$60.00 e. \$180.00 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? A) \$ 92.00 B) \$ 89.92 C) \$ 95.40 D) \$ 99.80 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? A) \$4.50 B) \$18.00 C) \$32.22 D) \$42.00 E) None of the above 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 ? A) \$42.00 B) \$45.00 C) \$55.00 D) \$50.00 E) none of the above P0=C1/(r-g)=3/0.06=\$50 9.What should be the price for a common stock paying \$3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? A) \$22.86 B) \$28.00 C) \$42.00 D) \$43.75 E) None of the above BDDCD 8. The rate at which the stock price is expected to appreciate (or depreciate) is the: A) Current yield. B) Yield to maturity. C) Capital gains yield. D) Dividend yield. E) Earnings yield. 2
P o = Div r = = 3.50 .08 \$43.75 10.What would be the current price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock’s required return is 13% and next year dividend payment is \$5 per share? A) \$61.60

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## This note was uploaded on 10/05/2011 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.

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350i3stockcocn - FIN350 ICW No. 3-Stock Valuation and Cost...

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