Question 1

National Advertising just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
A) $14.52
B) $14.89
C) $15.26
D) $15.64
E) $16.03

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 0.75 \
\mathrm{~b} & 1.25 \
1 \mathrm{RF} & 4.5 \% \
\mathrm{~T}_{\mathrm{M}} & 10.5 \% \
\mathrm{~g} & 6.5 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 0.7988 \
\mathrm{I}_{\mathrm{S}}=\mathrm{R}_{\mathrm{RF}}+\mathrm{b}\left(\mathrm{I}_{\mathrm{M}}-\mathrm{R}_{\mathrm{RF}}\right)= & 12.0 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 14.52
\end{array}$

Question 2

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?
A) $37.52
B) $39.40
C) $41.37
D) $43.44
E) $45.61

Accepted Answer

$\begin{array}{lr}
\text { Next expected dividend  =   = } & \$ 1.60 \
\text {Required return }  &11.0 \% \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}=  &6.0 \% \
\text {Find the growth rate: g =rs-   yield=  }  & 5.0 \% \
\text { Expected dividend }=\mathrm{P}_{0}=\mathrm{D}_{1}\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 26.67 \
\text { Years in the future }  &7\
\tilde{\mathrm{P}}_{7}=\mathrm{P}_{0}(1+g)^{7} & \$ 37.52 \
\end{array}$

Question 3

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array}{lcc}
& \mathrm{A}& \underline{\mathrm{B}}\
\text { Beta } &1.10&0.90\
\text { Constant growth rate } & 7.00 \% & 7.00 \%
\end{array}$
A) stock a must have a higher dividend yield than stock b.
B) stock b's dividend yield equals its expected dividend growth rate.
C) stock b must have the higher required return.
D) stock b could have the higher expected return.
E) stock a must have a higher stock price than stock b.

Accepted Answer

Statement a is true, because Stock A has a higher required return but the stocks have the same growth rate, so Stock A must have the higher dividend yield. Here are some calculations to demonstrate the point.
 $\begin{array}{cccccccc} 
&\text { r}_{RF} && \text { beta } & & \text { RP}_{M} & & \text { rStock } \
\hline  \mathrm{A} & 6.40 \% & + & 1.10 & \times & 6.00 \% & = & 13.00 \% \
\mathrm{~B} & 6.40 \% & + & 0.90 & \times & 6.00 \% & = & 11.80 \%\
\hline 
\end{array}$
$\begin{array}{ccccc}
&\text { Div. Yld. } & & g & & r_{\text {Stock }} \
\hline A&\mathrm{D}_{1} / \mathrm{P}_{0}+ & + & 7.00 \% & = & 13.00 \% &\mathrm{D}_{1} / \mathrm{P}_{0}=\mathrm{r}-\mathrm{g}=6.00 \%\
B&\mathrm{D}_{1} / \mathrm{P}_{0} & + & 7.00 \% & = & 11.80 \%&\mathrm{D}_{1} / \mathrm{P}_{0}=r-g=4.80 \%
\end{array}$

Question 4

Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
A) $41.59
B) $42.65
C) $43.75
D) $44.87
E) $45.99

Accepted Answer

rs = 9.0%
 $\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Growth rates: } & & 30.0 \% & 10.0 \% & 5.0 \% \
\text { Dividend } & \$ 1.32 & \$ 1.716 & \$ 1.888 & \$ 1.982 \
\text { Horizon value } = \mathrm { D } _ { 3 } / \left( r _ { 5 } - \mathrm { g } _ { 3 } \right) = & & 49.550 & & \
\hline \text { Total CFs } & & \$ 1.716 & \$ 51.437 & \
\text { pV of CFs } & & \$ 1.574 & \$ 43.294 &
\end{array}$ 
Stock price = $44.87

Question 5

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?
A) 7.54%
B) 7.73%
C) 7.93%
D) 8.13%
E) 8.34%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 5.5 \% \
\mathrm{P}_{0} & \$ 44.00 \
\text { Total return }=r_{\mathrm{S}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 8.34 \%
\end{array}$

Question 6

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?
A) 4.12%
B) 4.34%
C) 4.57%
D) 4.81%
E) 5.05%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 4.7 \% \
\mathrm{P}_{0} & \$ 26.00 \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}= & 4.81 \%
\end{array}$

Question 7

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
A) $40.17
B) $41.20
C) $42.26
D) $43.34
E) $44.46

Accepted Answer

$\begin{array}{lr}
\text { Growth rate } & 4.75 \% \
\text { Years in the future } & 5\
\text { Stock price } &  \$ 35.25\
P_{5}=P_{0}(1+g)^{5}= &  \$ 44.46
\end{array}$

Question 8

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P₀? A) $18.62 B) $19.08 C) $19.56 D) $20.05 E) $20.55

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 0.75 \
\mathrm{~b} & 1.15 \
\mathrm{R} \mathrm{R}_{\mathrm{R}} & 4.0 \% \
\mathrm{R}_{\mathrm{M}} & 5.0 \% \
\mathrm{D} & 5.5 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 0.7913 \
\mathrm{I}_{\mathrm{S}}=\mathrm{R}_{\mathrm{R}}+\mathrm{b}\left(\mathrm{RP}_{\mathrm{M}}\right)= & 9.75 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 18.62
\end{array}$

Question 9

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?
A) 8.37%
B) 8.59%
C) 8.81%
D) 9.03%
E) 9.27%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.75 \
\mathrm{~g} & 3.6 \% \
\mathrm{P}_{0} & \$ 32.00 \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.81 \
\text { Total return }=\mathrm{r}_{\mathrm{s}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 9.27 \%
\end{array}$

Question 10

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?
A) 6.50%
B) 6.83%
C) 7.17%
D) 7.52%
E) 7.90%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.50 \
\mathrm{~g} & 6.5 \% \
\mathrm{P}_{0} & \$ 56.00 \
\text { Capital gains yield }=\mathrm{g}= & 6.50 \%
\end{array}$

Question 11

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?
A) $28.90
B) $29.62
C) $30.36
D) $31.12
E) $31.90

Accepted Answer

$$\begin{array} { l r } 
\mathrm { D } _ { 1 } & \$ 1.25 \
 b& 1.15 \
\mathrm { r } _ { R F} & 5.50 \% \
\mathrm { RP } _ { \mathrm { M } } & 4.00 \% \
\mathrm {~g}& 6.00 \% \
 \mathrm { r } _ { s } = \mathrm { r } _ { \mathrm {R F } } + b \left( R P _ { \mathrm { M } } \right) =  & 10.33 \% \
\mathrm { P } _ { \mathrm { 0 } } = \mathrm { D } _ { 1 } / \left( \mathrm { r } _ { s } - \mathrm { g } \right)& \$ 28.90
\end{array}$$

Question 12

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
A) $26.77
B) $27.89
C) $29.05
D) $30.21
E) $31.42

Accepted Answer

$\begin{array}{lr}
\text { Last dividend }\left(\mathrm{D}_{0}\right) & \$ 1.25 \
\text { Short-run growth rate } & 25 \% \
\text { Long-run growth rate } & 0 \% \
\text { Beta } & 1.20 \
\text { Market risk premium } & 5.50 \% \
\text { Risk-free rate } & 3.00 \% \
\text { Required return }=r_{\mathrm{S}}=\mathrm{r}_{\mathrm{RF}}+\mathrm{b}\left(\mathrm{R} \mathrm{P}_{\mathrm{M}}=\right. & 9.60 \%
\end{array}$ 
 $\begin{array}{lcccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline & & 25 \% & 25 \% & 25 \% & 25 \% & 0 \% \
\text { Dividend } & \$ 1.2500 & \$ 1.5625 & \$ 1.9531 & \$ 2.4414 & \$ 3.0518 & \$ 3.0518 \
\text { Horizon value }=\mathrm{D}_{5} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}_{5}\right)= & & & 31.7891 & & & \
\hline \text { Total CFs } & & \$ 1.5625 & \$ 1.9531 & \$ 2.4414 & \$ 34.8409 & \
\mathrm{PV} \text { of the CFs } & & \$ 1.4256 & \$ 1.6260 & \$ 1.8544 & \$ 24.1461 &
\end{array}$ 
Price = Sum of PVs = $29.05

Question 13

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
A) $17.39
B) $17.84
C) $18.29
D) $18.75
E) $19.22

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 0.75 \
\mathrm{r}_{\mathrm{s}} & 10.5 \% \
\mathrm{~g} & 6.4 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 18.29
\end{array}$

Question 14

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?
A) 6.01%
B) 6.17%
C) 6.33%
D) 6.49%
E) 6.65%

Accepted Answer

$\begin{array}{lr}
\text { Expected dividend }\left(\mathrm{D}_{1}\right) & \$ 1.25 \
\text { Stock price } & \$ 32.50 \
\text { Required return } & 10.5 \% \
\text { Dividend yield } & 3.85 \% \
\text { Growth rate }=r_{\mathrm{S}}-\mathrm{D}_{1} / \mathrm{P}_{0}= & 6.65 \%
\end{array}$

Question 15

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D₁? A) $2.20 B) $2.44 C) $2.69 D) $2.96 E) $3.25

Accepted Answer

$\begin{array}{lr}
\text { Stock price } & \$ 57.50 \
\text { Required return } & 10.25 \% \
\text { Growth rate } & 6.00 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right), \text { so } \mathrm{D}_{1}=\mathrm{P}_{0}\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \
\text { Expected dividend }=\mathrm{D}_{1}=\mathrm{P}_{0}\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right)=& \$ 2.44
\end{array}$

Question 16

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?
A) $37.86
B) $38.83
C) $39.83
D) $40.85
E) $41.69

Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text { Stock price } \
\text { Growth rate } \
\text { Years in the future } \
P _ { 3 } = P _ { 0 } ( 1 + g ) ^ { 3 } =
\end{array}
\begin{array} { r } 
\$ 35.50 \
5.50 \% \
3 \
\$ 41.69
\end{array}
\end{array}$

Question 17

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?
A) 4.42%
B) 4.66%
C) 4.89%
D) 5.13%
E) 5.39%

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 2.25 \
\mathrm{~g} & 3.5 \% \
\mathrm{P}_{0} & \$ 50.00 \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 2.329 \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}= & 4.66 \%
\end{array}$

Question 18

A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
A) $16.28
B) $16.70
C) $17.13
D) $17.57
E) $18.01

Accepted Answer

$\begin{array}{lr}
\text { Last dividend }\left(\mathrm{D}_{0}\right) & \$ 1.00 \
\text { Long-run growth rate } & 5.4 \% \
\text { Required return } & 11.4 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.054 \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 17.57
\end{array}$

Question 19

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D₀? A) $0.95 B) $1.05 C) $1.16 D) $1.27 E) $1.40

Accepted Answer

$\begin{array}{lr}
\text { Stock price } & \$ 25.00 \
\text { Required return } & 11.50 \% \
\text { Growth rate } & 7.00 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right), \text { so } \mathrm{D}_{1}=\mathrm{P}_{0}\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right)= & \$ 1.1250 \
\text { Last dividend }=\mathrm{D}_{0}=\mathrm{D}_{1} /(1+\mathrm{g}) & \$ 1.05
\end{array}$

Question 20

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?
A) $23.11
B) $23.70
C) $24.31
D) $24.93
E) $25.57

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.50 \
\mathrm{r}_{\mathrm{s}} & 10.1 \% \
\mathrm{~g} & 4.0 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.56 \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 25.57
\end{array}$

Quiz 8: Basic Stock Valuation

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P₀?

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D₁?

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D₀?