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

investor, receive, percent, 2009

Q18. An investor is considering acquiring a common stock that he would like to hold for one year. He expects to receive both $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?

A) $27.30.

B) $23.91.

C) $24.11.

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.

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.

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.

Q22. Utilizing the infinite period dividend discount model, all else held equal, if the required rate of return (K_e) 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.

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.

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.

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.