Reading 41: Discounted Dividend Valuation- LOS d～ Q1-8

expected, required, company, return, common

LOS d: Calculate the value of a common stock using the Gordon growth model and explain the underlying assumptions.

Q1. The value per share for Burton, Inc. is $32.00 using the Gordon Growth model. The company paid a dividend of $2.00 last year. The estimates used to calculate the value have changed. If the new required rate of return is 12.00% and expected growth rate in dividends is 6%, the value per share will increase by:

A) 4.17%.

B) 9.51%.

C) 10.42%.

Q2. Suppose the equity required rate of return is 10%, the dividend just paid is $1.00 and dividends are expected to grow at an annual rate of 6% forever. What is the expected price at the end of year 2?

A) $28.09.

B) $27.07.

C) $29.78.

Q3. A company reports January 1, 2002, retained earnings of $8,000,000, December 31, 2002, retained earnings of $10,000,000, and 2002 net income of $5,000,000. The company has 1,000,000 shares outstanding and dividends are expected to grow at a rate of 5% per year. What is the expected dividend at the end of 2003?

A) $3.15.

B) $3.00.

C) $13.65.

Q4. Jax, Inc., pays a current dividend of $0.52 and is projected to grow at 12%. If the required rate of return is 11%, what is the current value based on the Gordon growth model?

A) $58.24.

B) unable to determine value using Gordon model.

C) $39.47.

Q5. A firm currently pays a dividend of $1.77, which is expected to grow at a rate of 4%. If the required return is 10%, what is the current value of the shares using the Gordon growth model?

A) $30.68.

B) $29.76.

C) $29.50.

Q6. Jand, Inc., currently pays a dividend of $1.22, which is expected to grow at 5%. If the current value of Jand’s shares based on the Gordon model is $32.03, what is the required rate of return?

A) 9%.

B) 8%.

C) 7%.

Q7. A firm's dividend per share in the most recent year is $4 and is expected to grow at 6% per year forever. If its shareholders require a return of 14%, the value of the firm's stock (per share) using the single-stage dividend discount model (DDM) is:

A) $50.00.

B) $53.00.

C) $28.57.

Q8. IAM, Inc. has a current stock price of $40.00 and expects to pay a dividend in one year of $1.80. The dividend is expected to grow at a constant rate of 6% annually. IAM has a beta of 0.95, the market is expected to return 11%, and the risk-free rate of interest is 4%. The expected stock price two years from today is closest to:

A) $43.49.

B) $41.03.

C) $43.94.