1.
A stock is not expected to pay a dividend over the next four years. Five
years from now, the company anticipates that it will establish a dividend
of $1.00 per share (i.e., D_{5} = $1.00). Once the dividend is
established, the market expects that the dividend will grow at a constant
rate of 5 percent per year forever. The riskfree rate is 5 percent, the
company’s beta is 1.2, and the market risk premium is 5 percent. The
required rate of return on the company’s stock is expected to remain
constant. What is the current stock price?

A:
$ 7.36
B:
$ 8.62
C:
$ 9.89
D:
$10.98

2.
Mack Industries just paid a dividend of $1.00 per share (i.e., D_{0}
= $1.00). Analysts expect the company’s dividend to grow 20 percent this
year (i.e., D_{1} = $1.20), and 15 percent next year. After two
years the dividend is expected to grow at a constant rate of 5 percent.
The required rate of return on the company’s stock is 12 percent. What
should be the current price of the company’s stock?

A:
$12.33
B:
$16.65
C:
$16.91
D:
$18.67

3.
R. E. Lee
recently took his company public through an initial public offering. He is
expanding the business quickly to take advantage of an otherwise unexploited
market. Growth for his company is expected to be 40 percent for the first
three years and then he expects it to slow down to a constant 15 percent. The
most recent dividend (D_{0}) was $0.75. Based on the most recent
returns, the beta for his company is approximately 1.5. The riskfree rate is
8 percent and the market risk premium is 6 percent. What is the current price
of Lee’s stock? 
A:
$77.14
B:
$75.17
C:
$67.51
D:
$73.88

4.
A stock is
expected to pay no dividends for the first three years, i.e., D_{1} =
$0, D_{2} = $0, and D_{3} = $0. The dividend for Year 4 is
expected to be $5.00 (i.e., D_{4} = $5.00), and it is anticipated that
the dividend will grow at a constant rate of 8 percent a year thereafter. The
riskfree rate is 4 percent, the market risk premium is 6 percent, and the
stock’s beta is 1.5. Assuming the stock is fairly priced, what is the current
price of the stock? 
A:
$
69.31
B:
$
72.96
C:
$
79.38
D:
$
86.38

5.
Stewart
Industries expects to pay a $3.00 per share dividend on its common stock at
the end of the year (D_{1} = $3.00). The dividend is expected to grow
25 percent a year until t = 3, after which time the dividend is expected to
grow at a constant rate of 5 percent a year (i.e., D_{3} = $4.6875 and
D_{4} = $4.9219). The stock’s beta is 1.2, the riskfree rate of
interest is 6 percent, and the rate of return on the market is 11 percent.
What is the company’s current stock price? 
A:
$29.89
B:
$30.64
C:
$37.29
D:
$53.69

6.
McPherson
Enterprises is planning to pay a dividend of $2.25 per share at the end of the
year (i.e., D_{1} = $2.25). The company is planning to pay the same
dividend each of the following 2 years and will then increase the dividend to
$3.00 for the subsequent 2 years (i.e., D_{4} and D_{5}).
After that time the dividends will grow at a constant rate of 5 percent per
year. If the required return on the company’s common stock is 11 percent per
year, what is the current stock price? 
A:
$52.50
B:
$40.41
C:
$37.50
D:
$50.00

7.
Hadlock
Healthcare expects to pay a $3.00 dividend at the end of the year (D_{1}
= $3.00). The stock’s dividend is expected to grow at a rate of 10 percent a
year until three years from now (t = 3). After this time, the stock’s
dividend is expected to grow at a constant rate of 5 percent a year. The
stock’s required rate of return is 11 percent. What is the price of the stock
today? 
A:
49
B:
54
C:
64
D:
52

8.
Rogers
Robotics currently (1998) does not pay a dividend. However, the company is
expected to pay a $1.00 dividend two years from today (2000). The dividend is
then expected to grow at a rate of 20 percent a year for the following three
years. After the dividend is paid in 2003, it is expected to grow forever at a
constant rate of 7 percent. Currently, the riskfree rate is 6 percent, market
risk premium (k_{M} –
k_{RF}) is 5 percent, and the stock’s beta is 1.4. What should
be the price of the stock today? 
A:
22.91
B:
21.20
C:
20.16
D:
28.80

9.
Whitesell
Technology has just paid a dividend (D_{0}) and is expected to pay a
$2.00 pershare dividend at the end of the year (D_{1}). The dividend
is expected to grow 25 percent a year for the following four years, (i.e., D_{5}
= $2.00 * (1.25)^{4} = $4.8828). After this time period, the dividend
will grow forever at a constant rate of 7 percent a year. The stock has a
required rate of return of 13 percent, (i.e., k_{s}
= 0.13). What is the expected price of the stock two years from today?
(Calculate the price assuming that D_{2} has already been paid.) 
A:
83.97
B:
95.87
C:
69.56
D:
67.63

10.
An analyst
estimates that Cheyenne Co. will pay the following dividends: D_{1} =
$3.0000, D_{2} = $3.7500, and D_{3}
= $4.3125. The analyst also estimates that the required rate of return on
Cheyenne’s stock is 12.2 percent. After the third dividend, the dividend is
expected to grow by 8 percent per year forever. What is the price of the stock
today? 
A:
$81.40
B:
$84.16
C:
$85.27
D:
$87.22

11.
Lewisburg
Company’s stock is expected to pay a dividend of $1.00 per share at the end of
the year. The dividend is expected to grow 20 percent per year each of the
following three years (i.e., D_{4} = $1.7280), after which time the
dividend is expected to grow at a constant rate of 7 percent per year. The
stock’s beta is 1.2, the market risk premium is 4 percent, and the riskfree
rate is 5 percent. What is the price of the stock today? 
A:
$49.61
B:
$45.56
C:
$48.43
D:
$46.64

12.
Namath
Corporation’s stock is expected to pay a dividend of $1.25 per share at the
end of the year. The dividend is expected to increase by 20 percent per year
for each of the following two years. After that, the dividend is expected to
increase at a constant rate of 8 percent per year. The stock has a required
return of 10 percent. What should be the price of the stock today? 
A:
$50.00
B:
$59.38
C:
$70.11
D:
$76.76

13.
Faulkner
Corporation expects to pay an endofyear dividend, D_{1}, of $1.50
per share. For the next two years the dividend is expected to grow by 25
percent per year, after which time the dividend is expected to grow at a
constant rate of 7 percent per year. The stock has a required rate of return
of 12 percent. Assuming that the stock is fairly valued, what is the price of
the stock today?

A:
$45.03
B:
$40.20
C:
$37.97
D:
$36.38

14.
The Textbook
Production Company has been hit hard due to increased competition. The
company’s analysts predict that earnings (and dividends) will decline at a
rate of 5 percent annually forever. Assume that k_{s}
= 11 percent and D_{0} = $2.00. What will be the price of the
company’s stock three years from now? 
A:
$27.17
B:
$
6.23
C:
$28.50
D:
$10.18

15.
Newburn
Entertainment’s stock is expected to pay a yearend dividend of $3.00 a
share. (D_{1} = $3.00, the dividend at time 0, D_{0}, has
already been paid.) The stock’s dividend is expected to grow at a constant
rate of 5 percent a year. The riskfree rate, k_{RF},
is 6 percent and the market risk premium, (k_{M}
– k_{RF}), is 5 percent. The stock has a
beta of 0.8. What is the stock’s expected price
five years from now? 
A:
$60.00
B:
$76.58
C:
$96.63
D:
$72.11
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