Chapter 7 Sample Test Questions

# Chapter 7 Sample Test Questions - Chapter 7 Test Questions...

This preview shows pages 1–2. Sign up to view the full content.

Chapter 7 Test Questions Question 1 KDP’s most recent dividend was \$2 per share and is selling today in the market for \$70. The dividend is expected to grow at a rate of 7% per year for the foreseeable future. If the market return is 10% on investments with comparable risk, should you purchase the stock? a. No, because the stock is overpriced \$1.33 b. No, because the stock is overpriced \$3.33 c. Yes, because the stock is underpriced \$1.33 d. Yes, because the stock is underpriced \$3.33 Answer Question 1 Using the Gordon Growth equation. We take D 1 = \$2*1.07 = \$2.14 and divide it by (.1-.07) = \$71.33. Since the value of the stock is greater than the price is a good buy (undervalued in the market by \$1.33 since it is selling for only \$70). Answer : C Question 2 The Extreme Reaches Corp. last paid a \$1.50 per share annual dividend. The company is planning on paying \$3.00, \$5.00, \$7.50, and \$10.00 a share over the next four years, respectively. After that the dividend will be a constant \$2.50 per share per year forever. What is the market price of this stock if the market rate of return is 15 percent? a. \$17.04 b. \$22.39 c. \$26.57 d. \$29.08 e. \$33.71 Answer Question 2 Below is the timeline used. We had to get the PV for the dividends in years 1-4 and find the value of the constant dividends after year 4 using the Gordon Growth Formula shown in the table (note: g=0). We used our calculators to find the PV of each year summing both the \$10.00 dividend and the \$16.67 (value of all future dividends) in year 4 (remember: the Gordon growth model gives you a value one period before the first payment). Finally we just add

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 4

Chapter 7 Sample Test Questions - Chapter 7 Test Questions...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online