Quiz
Quiz Review

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., D5 = $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 risk-free 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., D0 = $1.00).  Analysts expect the company’s dividend to grow 20 percent this year (i.e., D1 = $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 (D0) was $0.75. Based on the most recent returns, the beta for his company is approximately 1.5.  The risk-free 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., D1 = $0, D2 = $0, and D3 = $0.  The dividend for Year 4 is expected to be $5.00 (i.e., D4 = $5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter.  The risk-free 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 (D1 = $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., D3 = $4.6875 and D4 = $4.9219).  The stock’s beta is 1.2, the risk-free 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., D1 = $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., D4 and D5).  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 (D1 = $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 risk-free rate is 6 percent, market risk premium (kM kRF) 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 (D0) and is expected to pay a $2.00 per-share dividend at the end of the year (D1). The dividend is expected to grow 25 percent a year for the following four years, (i.e., D5 = $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., ks = 0.13). What is the expected price of the stock two years from today? (Calculate the price assuming that D2 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: D1 = $3.0000, D2 = $3.7500, and D3 = $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., D4 = $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 risk-free 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 end-of-year dividend, D1, 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 ks = 11 percent and D0 = $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 year-end dividend of $3.00 a share.  (D1 = $3.00, the dividend at time 0, D0, has already been paid.)  The stock’s dividend is expected to grow at a constant rate of 5 percent a year. The risk-free rate, kRF, is 6 percent and the market risk premium, (kMkRF), 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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