CARNEGIE MELLON UNIVERSITY
Tepper School of Business
INTRO FINANCE – FIN 70391
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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View Full Document(d) 200.0%
(e) None of the above
4. What is the relationship between the earningsprice ratio (
E/P
) and the discount rate (opportunity
cost of capital
r
)?
(a) There is no relationship between the earningsprice 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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 Spring '08
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 Finance, Covariance, Standard Deviation, Variance, Dividends, Dividend

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