Multiple Choice Quiz
Multiple Choice Quiz
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 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