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practice problems chapter_9_10_11 (1)

practice problems chapter_9_10_11 (1) - Fin 3010 Exam III...

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Fin 3010 Exam III Summer 2009 Time: 100 minutes 1. In constant growth model, expected capital gains yield changes year to year. a. True b. False 2. Expected dividend divided by the current price of a stock is called a. Actual Dividend b. Dividend Growth c. Dividend Yield d. Dividend Payout. 3. Target (or optimal) capital structure is the percentages of debt, preferred stock, and common equity that maximizes the firm’s stock prices. a. True b. False 4. The reason for using MIRR is that 5. Payback period is flawed because 6. Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds? I. Future cash flows on stocks are not known in advance. II. Common stocks don't have a maturity date. III. Common stock valuation is sensitive to estimates of the dividend growth rate. 7. Interest rates and tax rates are the factors that are beyond the firm’s control but obviously affect the firm’s WACC. a. True b. False 8. The XYZ Company just paid a dividend of $1 per share, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price? a. $19.25 b. $21.00 c. $22.75 d. $24.50 e. None of them Cost of stock = 9% Price = 1*1.05/(.09 - .05) = $26.25 9. A share of preferred stock pays a quarterly dividend of $1.50. If the price of the stock is $50, what 1
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is the effective annual (not nominal) rate of return on the preferred stock? Return = Div/Price = 1.50/50 = 3% Compounded quarterly 1.03^4 – 1 = 12.55%, it is the effective rate. 10. If D 1 = $4.00, g (which is constant) = 6%, and P 0 = $40, what is the stock’s expected dividend yield for the coming year? DY = 4/40 = 10% 11. If D 0 = $2.00, g (which is constant) = 6%, and P 0 = $40, what is the stock’s expected total return for the coming year? r-hat = 2*1.06/40 + 6% = 11.3% 12. Luna Corp.’s stock has a required rate of return of 10%, and it sells for $40 per share. Wald's dividend is expected to grow at a constant rate of 7% per year. What is the expected year-end dividend, D 1 ? a. $0.90 b. $1.00 c. $1.10 d. $1.20 e. $1.30 P-hat-zero = D 1 /(r s – g), Thus, D 1 = $40(.10 - .07) = $1.20
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