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Q18. An investor is considering acquiring a common stock that he would like to hold for one year. He expects to receive both $ffice:smarttags" />1.50 in dividends and $26 from the sale of the stock at the end of the year. What is the maximum price he should pay for the stock today to earn a 15 percent return?ffice ffice" />
A) $27.30.
B) $23.91.
C) $24.11.
Correct answer is B)
By discounting the cash flows for one period at the required return of 15% we get: x = (26 + 1.50) / (1+.15)1
(x)(1.15) = 26 + 1.50
x = 27.50 / 1.15
x = $23.91
Q19. Assume that a stock paid a dividend of $1.50 last year. Next year, an investor believes that the dividend will be 20% higher and that the stock will be selling for $50 at year-end. Assume a beta of 2.0, a risk-free rate of 6%, and an expected market return of 15%. What is the value of the stock?
A) $41.77.
B) $45.00.
C) $40.32.
Correct answer is A)
Using the Capital Asset Pricing Model, we can determine the discount rate equal to 0.06 + 2(0.15 – 0.06) = 0.24. The dividends next year are expected to be $1.50 × 1.2 = $1.80. The present value of the future stock price and the future dividend are determined by discounting the expected cash flows at the discount rate of 24%: (50 + 1.8) / 1.24 = $41.77.
Q20. The following data pertains to a common stock:
- It will pay no dividends for two years.
- The dividend three years from now is expected to be $1.
- Dividends are expected to grow at a 7% rate from that point onward.
If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now?
A) $ 7.30
.B) $10.00.
C) $ 6.24.
Correct answer is A)
time line = $0 now; $0 in yr 1; $0 in yr 2; $1 in yr 3.
P2 = D3/(k - g) = 1/(.17 - .07) = $10
Note the math. The price is always one year before the dividend date.
Solve for the PV of $10 to be received in two years.
FV = 10; n = 2; i = 17; compute PV = $7.30
Q21. A firm will not pay dividends until four years from now. Starting in year four dividends will be $2.20 per share, the retention ratio will be 40%, and ROE will be 15%. If k = 10%, what should be the value of the stock?
A) $55.25.
B) $58.89.
C) $41.32.
Correct answer is C)
g = ROE × retention ratio = ROE × b = 15 × 0.4 = 6%
Based on the growth rate we can calculate the expected price in year 3:
P3 = D4 / (k ? g) = 2.2 / (0.10 ? 0.06) = $55
The stock value today is: P0 = PV (55) at 10% for 3 periods = $41.32
Q22. Utilizing the infinite period dividend discount model, all else held equal, if the required rate of return (Ke) decreases, the model yields a price that is:
A) reduced, due to increased spread between growth and required return.
B) reduced, due to the reduction in discount rate.
C) increased, due to a smaller spread between required return and growth.
Correct answer is C)
The denominator of the single-stage DDM is the spread between required return Ke, and expected growth rate, g. The smaller the denominator, all else held equal, the larger the computed value.
Q23. A stock has the following elements: last year’s dividend = $1, next year’s dividend is 10% higher, the price will be $25 at year-end, the risk-free rate is 5%, the market premium is 5%, and the stock’s beta is 1.2.
What happens to the price of the stock if the beta of the stock increases to 1.5? It will:
A) increase.
B) remain unchanged.
C) decrease.
Correct answer is C)
When the beta of a stock increases, its required return will increase. The increase in the discount rate leads to a decrease in the PV of the future cash flows.
Q24. What will be the current price of the stock with a beta of 1.5?
A) $23.51.
B) $20.23.
C) $23.20.
Correct answer is C)
k = 5 + 1.5(5) = 12.5%
P0 = (1.1 / 1.125) + (25 / 1.125) = $23.20
Q25. What value would be placed on a stock that currently pays no dividend but is expected to start paying a $1 dividend five years from now? Once the stock starts paying dividends, the dividend is expected to grow at a 5 percent annual rate. The appropriate discount rate is 12 percent.
A) $8.11.
B) $9.08.
C) $14.29.
Correct answer is B)
P4 = D5/(k-g) = 1/(.12-.05) = 14.29
P0 = [FV = 14.29; n = 4; i = 12] = $9.08.
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发表于 2009-3-2 13:52
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