fin1set03spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 3: From Present Value to Portfolios A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. Consider a stock that will pay a dividend of $1 per share one year from now. The dividend (paid annually) will then increase by 10% annually forever. Suppose that the discount rate is 12% and that the stock’s return on reinvested earnings is 15%. What is the EPS (earnings per share) one year from now? (a) $0.33 (b) $3.00 (c) $8.33 (d) $10.00 (e) None of the above 2. Consider a stock that will pay a dividend of $1 per share one year from now. The dividend (paid annually) will then increase by 10% annually forever. Suppose that the discount rate is 12% and that the stock’s return on reinvested earnings is 15%. What is the NPVGO? (a) $10 (b) $20 (c) $25 (d) $50 (e) None of the above 3. Consider a stock that will pay a dividend of $1 per share one year from now. The dividend (paid annually) will then increase by 10% annually forever. Suppose that the discount rate is 12% and that the stock’s return on reinvested earnings is 15%. What is the dividend yield ( D 1 /P 0 )? (a) 5.0% (b) 10.0% (c) 20.0% 1
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(d) 200.0% (e) None of the above 4. What is the relationship between the earnings-price ratio ( E/P ) and the discount rate (opportunity cost of capital r )? (a) There is no relationship between the earnings-price ratio and the market capitalization rate. (b) E/P underestimates r if the NPVGO is positive. (c) E/P overestimates r if the NPVGO is positive. (d) E/P exactly estimates r if the NPVGO is negative. (e) None of the above. 5. The finance director of a publicly traded company is considering increasing the plowback rate of the firm. The opportunity cost of capital is 9%, there are no taxes or transaction costs and there is an infinite supply of projects available. All such projects will return 9%. The following are comments that emerged from the directors meeting. Which of the following is/are correct? (a) We should not increase the plowback rate because, although this will increase the NPVGO, investors put a higher emphasis on near cash flows. (b) Although dividends will temporarily decrease, the NPVGO will increase. Since our company
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fin1set03spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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