A.
$25
Annie's Donut Shops, Inc. has expected earnings of $3.00 per share for next year. The firm's
ROE is 18% and its earnings retention ratio is 60%. If the firm's market capitalization rate is
12%, what is the value of the firm excluding any growth opportunities?
A.
$25.00
Flanders, Inc. has expected earnings of $4 per share for next year. The firm's ROE is 8% and
its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the
present value of its growth opportunities?
A.
-$6.33
Firm A is high risk and Firm B is low risk. Everything else equal, which firm would you
expect to have a higher P/E ratio?
C.
Both would have the same P/E if they were in the same industry
Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E
ratios of firms with lower expected growth rates.
A.
higher than
Value stocks are more likely to have a PEG ratio _____.
A.
less than one
Generally speaking, as the firm progresses through the industry life cycle you would expect
the PVGO to ________ as a percent of share price.
B.
decrease
Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming
year. Dividends are expected to grow at the rate of 8% per year. The riskfree rate of return is
4% and the expected return on the market portfolio is 14%. Investors use the CAPM to
compute the market capitalization rate on the stock, and the constant growth DDM to
determine the intrinsic value of the stock. The stock is trading in the market today at $84.00.
Using the constant growth DDM and the CAPM, the beta of the stock is _________.
B.
0.9
Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The
risk-free rate of return is 6% and the expected return on the market portfolio is 14%. Analysts
expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of
Westsyde Tool Company's stock is 1.20. Using the CAPM, an appropriate required return on
Westsyde Tool Company's stock is _________.
C.
15.6%
13-6

Chapter 13 - Equity Valuation
Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The
risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts
expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of
Westsyde Tool Company's stock is 1.20. Using a one-period valuation model, the intrinsic
value of Westsyde Tool Company stock today is _________.
B.
$27.39
Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate
of return is 5% and the expected return on the market portfolio is 12%. The stock of Todd
Mountain Development Corporation has a beta of 0.75. Using the CAPM, the return you
should require on the stock is _________.
B.
10.25%
Todd Mountain Development Corporation is expected to pay a dividend of $3.00 in the
upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate
of return is 5% and the expected return on the market portfolio is 17%. The stock of Todd
Mountain Development Corporation has a beta of 0.75. Using the constant growth DDM, the
intrinsic value of the stock is _________.

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- Spring '13
- Jacobsen
- Finance, Valuation, Dividend yield, P/E ratio, market capitalization rate