Reading 56: An Introduction to Security Valuation- LOS c(

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Q26. Assume a company has earnings per share of $5 and this year paid out 40% in dividends. The earnings and dividend growth rate for the next 3 years will be 20%. At the end of the third year the company will start paying out 100% of earnings in dividends and earnings will increase at an annual rate of 5% thereafter. If a 12% rate of return is required, the value of the company is approximately:

A) $102.80.

B) $92.92.

C) $55.69.

Q27. Use the following information and the multi-period dividend discount model to find the value of Computech’s common stock.

Last year’s dividend was $1.62.
The dividend is expected to grow at 12% for three years.
The growth rate of dividends after three years is expected to stabilize at 4%.
The required return for Computech’s common stock is 15%.

Which of the following statements about Computech's stock is least accurate?

A) Computech's stock is currently worth $17.46.

B) At the end of two years, Computech's stock will sell for $20.64.

C) The dividend at the end of year three is expected to be $2.27.

Q28. An analyst gathered the following information about a company:

The stock is currently trading at $31.00 per share.
Estimated growth rate for the next three years is 25%.
Beginning in the year 4, the growth rate is expected to decline and stabilize at 8%.
The required return for this type of company is estimated at 15%.
The dividend in year 1 is estimated at $2.00.

The stock is undervalued by approximately:

A) $15.70.

B) $6.40.

C) $0.00.

Q29. The last dividend paid on a common stock was $2.00, the growth rate is 5% and investors require a 10% return. Using the infinite period dividend discount model, calculate the value of the stock.

A) $40.00.

B) $13.33.

C) $42.00.

Q30.What is the approximate amount that an investor would be willing to pay today for the two years of abnormal dividends?

A) $1.62.

B) $1.83.

C) $1.55.

Q31. What would an investor pay for Day and Associates today?

A) $24.03.

B) $18.65.

C) $20.71.

Q32. Calculate the value of a common stock that last paid a $2.00 dividend if the required rate of return on the stock is 14 percent and the expected growth rate of dividends and earnings is 6 percent. What growth model is an example of this calculation?

Value of stock Growth model

A) $26.50 Supernormal growth

B) $25.00 Gordon growth

C) $26.50 Gordon growth

Q33. A company last paid a $1.00 dividend, the current market price of the stock is $20 per share and the dividends are expected to grow at 5 percent forever. What is the required rate of return on the stock?

A) 10.00%.

B) 10.25%.

C) 9.78%. B)