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LOS d: Calculate the value of a common stock using the Gordon growth model and explain the underlying assumptions. ffice ffice" />
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%.
Correct answer is C)
The value per share using the new estimates is $35.33 = [$2.0(1.06) / 0.12 - 0.06)] and the percentage increase in the value per share will be 10.42% = [(35.33 - 32.00) / 32.00] × 100%.
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.
Correct answer is C)
The terminal value is $29.78, and that is the price an investor should be willing to pay at the end of year 2. The correct answer is shown below.
|
Year |
Dividend |
|
1 |
$1.0600 |
|
2 |
$1.1236 |
|
3 |
$1.1910 |
|
|
|
|
V3: |
$1.191/(0.10 – 0.06) = $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.
Correct answer is A)
The first step is to determine 2002 dividends paid as ($8,000,000 + $5,000,000 ? 10,000,000) = $3,000,000. The next step is to find the dividend per share ($3,000,000 / 1,000,000 shares) = $3.00 per share. Applying the 5% growth rate, next year’s expected dividend is $3.15, or $3.00 × 1.05.
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.
Correct answer is B)
The Gordon growth model cannot be used if the growth rate exceeds the required rate of return.
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.
Correct answer is A)
The current value of the shares is $30.68:
V0 = [$1.77(1 + 0.04)] / (0.10 – 0.04)] = $30.68
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%.
Correct answer is A)
The required return is 9%: r = [$1.22(1 + 0.05) / $32.03] + 0.05 = 0.09 or 9%.
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.
Correct answer is B)
The value of the firm's stock is: $4 × [1.06 / (0.14 ? 0.06)] = $53.00
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.
Correct answer is A)
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发表于 2009-3-6 16:11
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