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LOS n, (Part 2): Calculate a required return using the Gordon growth model and the H-model. ffice ffice" />
Q1. If the expected return on the equity market is 10%, the risk-free rate is 3%, and an asset’s beta is 0.6, what is the appropriate equity risk premium for the asset in applying the Gordon growth model?
A) 6.40%.
B) 9.00%.
C) 4.20%.
Correct answer is C)
The asset’s equity risk premium is equal to it’s beta times the difference between the expected return on the equity market and the risk-free rate. Equity Risk Premium = 0.6(0.10 ? 0.03) = 0.042 or 4.2%.
Q2. A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm’s shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?
A) 8.25%.
B) 7.86%.
C) 8.00%.
Correct answer is C)
The Gordon DDM uses the dividend for the period (t + 1) which would be $1.05.
$35 = $1.05 / (required return – 0.05)
Required return = 0.08 or 8.00%
Q3. Given an equity risk premium of 3.5%, a forecasted dividend yield of 2.5% on the market index and a ffice:smarttags" />U.S. government bond yield of 4.5%, what is the consensus long-term earnings growth estimate?
A) 8.0%.
B) 10.5%.
C) 5.5%.
Correct answer is C)
Equity risk premium = forecasted dividend yield + consensus long term earnings growth rate – long-term government bond yield.
Therefore,
Consensus long term earnings growth rate =
Equity risk premium - forecasted dividend yield + long-term government bond yield
Consensus long term earnings growth rate = 3.5% - 2.5% + 4.5% = 5.5%
Q4. An investor projects the price of a stock to be $16.00 in one year and expected the stock to pay a dividend at that time of $2.00. If the required rate of return on the shares is 11%, what is the current value of the shares?
A) $14.11.
B) $15.28.
C) $16.22.
Correct answer is C)
The value of the shares = ($16.00 + $2.00) / (1 + 0.11) = $16.22
Q5. An investor computes the current value of a firm’s shares to be $34.34, based on an expected dividend of $2.80 in one year and an expected price of the share in one year to be $36.00. What is the investor’s required rate of return on this investment?
A) 13%.
B) 10%.
C) 11%.
Correct answer is A)
The required return = [($36.00 + $2.80) / $34.34 ] – 1 = 0.13 or 13%.
Q6. Currently the market index stands at 1,190.45. Firms in the index are expected to pay cumulative dividends of 35.71 over the coming year. The consensus 5-year earnings growth forecast for these firms is expected to increase to 6.2% up from last year’s forecast of 4.5%. The long-term government bond is yielding 5.0%. According to the Gordon growth model, what is the equity risk premium?
A) 4.2%.
B) 2.5%.
C) 1.2%.
Correct answer is A)
Equity risk premium = (35.71 / 1,190.45) + (6.2%) – 5.0% = 4.2%
Q7. Recent surveys of analysts report long-term earnings growth estimates as 5.5% and a forecasted dividend yield of 2.0% on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8%. According to the Gordon growth model, what is the equity risk premium?
A) 2.7%.
B) 7.5%.
C) 0.4%.
Correct answer is A)
Equity risk premium = 2.0% + 5.5% – 4.8% = 2.7%
Q8. CAB Inc. just paid a current dividend of $3.00, the forecasted growth is 9%, declining over four years to a stable 6% thereafter, and the current value of the firm’s shares is $50, what is the required rate of return?
A) 9.8%.
B) 10.5%.
C) 12.7%.
Correct answer is C)
The required rate of return is 12.7%.
r = ($3 / $50)[(1 + 0.06) + (4 / 2)(0.09 ? 0.06)] + 0.06 = 12.7%
Since the H-model is an approximation model, it is possible to solve for r directly without iteration.
Q9. Given that a firm’s current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm’s shares is $54.50, what is the required rate of return?
A) Can’t be determined.
B) 10%.
C) 9%.
Correct answer is C)
The equation to determine the required rate of return is solved through iteration.
$54.50 = $2(1.07) / (1 + r) + $2(1.07)2 / (1 + r)2 + {[$2(1.07)2(1.05)] / (r - 0.05)} / [(1 + r)2
Through iteration, r = 9%
Q10. Given that a firm’s current dividend is $2.00, the forecasted growth is 7%, declining over three years to a stable 5% thereafter, and the current value of the firm’s shares is $45, what is the required rate of return?
A) 7.8%.
B) 10.5%.
C) 9.8%.
Correct answer is C)
The required rate of return is 9.8%.
r = ($2/$45) [(1 + 0.05) + (3/2)(0.07 – 0.05)] + 0.05 = 0.0980
Since the H-model is an approximation model, it is possible to solve for r directly without iteration.
Q11. An investor buys shares of a firm at $10.00. A year later she receives a dividend of $0.96 and sells the shares at $9.00. What is her holding period return on this investment?
A) -0.4%.
B) -0.8%.
C) +1.2%.
Correct answer is A)
The holding period return = ($0.96 + $9.00 / $10.00) – 1 = –0.004 or –0.4%
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发表于 2009-3-9 09:29
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