The correct answer for each question is indicated by a .

1

Sam's Company expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two and then be sold for $136 per share. If the required rate on the stock is 20%, what is the current value of the stock?

A)

$100.10

B)

$105.69

C)

$110.00

D)

$120.29

2

The constant dividend growth formula P0 = DIV1/(r-g) assumes:

A)

The dividends are growing rate at a constant rate g forever.

B)

r > g

C)

g is never negative.

D)

Both A and B

3

Dividend growth rate for a stable firm can be estimated as:

A)

Plow back rate * the return on equity (ROE)

B)

Plow back rate / the return on equity (ROE)

C)

Plow back rate + the return on equity (ROE)

D)

Plow back rate − the return on equity (ROE)

4

Franks Co. is currently paying a dividend of $2.20 per share (DIV0). The dividends are expected to grow at 25% per year for the next four years and then grow 5% per year thereafter. Calculate the expected dividend in year 6.

A)

$5.37

B)

$2.95

C)

$5.92

D)

$8.39

5

The value of the stock:

A)

Increases as the dividend growth rate increases

B)

Increases as the required rate of return decreases

C)

Increases as the required rate of return increases

D)

Both A and B

6

Companies with higher expected growth opportunities usually sell for:

A)

Lower P/E ratio

B)

Higher P/E ratio

C)

A price that is independent of P/E ratio

D)

A price that the dependent upon the payment ratio

7

A high proportion of the value a growth stock comes from:

A)

Past dividend payments

B)

Past earnings

C)

PVGO (Present Value of the Growth Opportunities)

D)

Both A and B

8

FastGrow is a no growth firm and has two million shares outstanding. It is expected to earn a constant $20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.

A)

$200

B)

$100

C)

$150

D)

$50

9

Knight Inc. is expected to pay a $1.80 dividend next year. The dividend in year 2 is expected to be $2.10. The dividend in year 3 is expected to be $2.50. After that, the dividend is expected to grow at a constant rate of 2%. The cost of capital is 10%. What is Knight's stock price?

A)

$27.02

B)

$29.20

C)

$31.88

D)

$32.12

10

K&K Corp. just paid a dividend of $2.00 (DIV0). It is expected to grow at 5% for three years. Then, it will grow at a constant rate of 2%. If the cost of capital is 8%, what is the current stock price?

A)

$31.88

B)

$34.60

C)

$36.92

D)

$39.36

11

Smokes Inc. just paid a dividend of $3.00 (DIV0). Because of decreasing demand, the dividend is expected to decrease at a constant rate of 4%. The cost of capital is 11%. What is the stock price?

A)

$0.00

B)

$19.20

C)

$20.00

D)

$44.57

12

You are planning to buy a share of stock. You expect next year's dividend to be $1.25 (DIV1). You plan to sell the stock at the end of year 2 for $42.50 (after receiving the year 2 dividend of $1.50). What is the maximum price you would be willing to pay for this investment if your required rate of return is 12%?

A)

$30.00

B)

$32.56

C)

$36.19

D)

$42.50

13

Given a stock price of $39.77 and an expected return to shareholders of 12.4%, what is the likely growth rate if the annual dividend next year is expected to be $3.50?

A)

0.0%

B)

3.6%

C)

8.4%

D)

12.4%

14

A stock is trading for $35.00 and the firm has no growth potential. An analysis reveals that the price from a new growth oriented investment would be $55.00. What is the PVGO of this new project?

A)

$0.00

B)

$20.00

C)

$35.00

D)

$55.00

15

Spring Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the required rate of return on the stock is 15% and dividends are growing at a current rate of 8% per year, calculate the present value of the growth opportunity for the stock (PVGO)?

A)

$57.17

B)

$50.00

C)

$26.66

D)

$7.14

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