pAgOd Na AkO pArT 2

STOCKS AND THEIR VALUATION
a. 6.01%
CONSTANT GROWTH VALUATION b. 6.17%
1. A stock is expected to pay a dividend of c. 6.33%
d. 6.49%
$0.75 at the end of the year. The required
e. 6.65%
rate of return is rs = 10.5%, and the
expected constant growth rate is g = 6.4%.
EXPECTED DIVIDEND YIELD
What is the stock's current price?
1. If D1 = $1.25, g (which is constant) =
a. $17.39
4.7%, and P0 = $26.00, what is the
b. $17.84
stock’s expected dividend yield for the
c. $18.29
coming year?
d. $18.75
e. $19.22 a. 4.12%
b. 4.34%
c. 4.57%
2. A stock just paid a dividend of D0 = $1.50. d. 4.81%
The required rate of return is rs = 10.1%, and e. 5.05%
the constant growth rate is g = 4.0%. What
is the current stock price? 2. If D0 = $2.25, g (which is constant) =
a. $23.11 3.5%, and P0 = $50, what is the stock’s
b. $23.70 expected dividend yield for the coming
c. $24.31 year?
d. $24.93 a. 4.42%
e. $25.57 b. 4.66%
c. 4.89%
3. A share of common stock just paid a d. 5.13%
dividend of $1.00. If the expected long-run e. 5.39%
growth rate for this stock is 5.4%, and if
investors' required rate of return is 11.4%, 3. Goode Inc.'s stock has a required rate of
what is the stock price? return of 11.50%, and it sells for $25.00
a. $16.28 per share. Goode's dividend is expected
b. $16.70 to grow at a constant rate of 7.00%.
c. $17.13 What was the last dividend, D0?
d. $17.57 a. $0.95
e. $18.01 b. $1.05
c. $1.16
4. Gay Manufacturing is expected to pay a d. $1.27
dividend of $1.25 per share at the end of
the year (D1 = $1.25). The stock sells for EXPECTED CAPITAL GAINS YIELD
$32.50 per share, and its required rate of 4. If D1 = $1.50, g (which is constant) =
return is 10.5%. The dividend is expected to 6.5%, and P0 = $56, what is the stock’s
grow at some constant rate, g, forever. expected capital gains yield for the
What is the equilibrium expected growth coming year?
rate? a. 6.50%
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b. 6.83% 2. Sorenson Corp.’s expected year-end
c. 7.17% dividend is D1 = $1.60, its required return is
d. 7.52% rs = 11.00%, its dividend yield is 6.00%, and
e. 7.90% its growth rate is expected to be constant in
the future. What is Sorenson's expected
stock price in 7 years, i.e., is?
EXPECTED TOTAL RETURN a. $37.52
b. $39.40
c. $41.37
1. If D1 = $1.25, g (which is constant) = d. $43.44
5.5%, and P0 = $44, what is the stock’s e. $45.61
expected total return for the coming
year? CONSTANT GROWTH VALUATION AND
a. 7.54% CAPM
b. 7.73%
c. 7.93% 1. Schnusenberg Corporation just paid a
d. 8.13% dividend of D0 = $0.75 per share, and that
e. 8.34% dividend is expected to grow at a constant
rate of 6.50% per year in the future. The
2. If D0 = $1.75, g (which is constant) = company's beta is 1.25, the required return
3.6%, and P0 = $32.00, what is the on the market is 10.50%, and the risk-free
stock’s expected total return for the rate is 4.50%. What is the company's
coming year? current stock price?
a. 8.37% a. $14.52
b. 8.59% b. $14.89
c. 8.81% c. $15.26
d. 9.03% d. $15.64
e. 9.27% e. $16.03
CONSTANT GROWTH: FUTURE PRICES 2. Nachman Industries just paid a dividend

of D0 = $1.32. Analysts expect the
1. Reddick Enterprises' stock currently sells company's dividend to grow by 30% this
for $35.50 per share. The dividend is year, by 10% in Year 2, and at a constant
projected to increase at a constant rate rate of 5% in Year 3 and thereafter. The
of 5.50% per year. The required rate of required return on this low-risk stock is
return on the stock, rs, is 9.00%. What 9.00%. What is the best estimate of the
is the stock's expected price 3 years stock’s current market value?
from today? a. $41.59
a. $37.86 b. $42.65
b. $38.83 c. $43.75
c. $39.83 d. $44.87
d. $40.85 e. $45.99
e. $41.69
d. $40.48
e. $41.70
NONCONSTANT GROWTH VALUATION

CORPORATE VALUATION MODEL
1. Nachman Industries just paid a
dividend of D0 = $1.32. Analysts expect 1. Mooradian Corporation’s free cash flow
the company's dividend to grow by during the just-ended year (t = 0) was
30% this year, by 10% in Year 2, and at $150 million, and its FCF is expected to
a constant rate of 5% in Year 3 and grow at a constant rate of 5.0% in the
thereafter. The required return on this future. If the weighted average cost of
low-risk stock is 9.00%. What is the capital is 12.5%, what is the firm’s total
best estimate of the stock’s current corporate value, in millions?
market value? a. $1,895
a. $41.59 b. $1,995
b. $42.65 c. $2,100
c. $43.75 d. $2,205
d. $44.87 e. $2,315
e. $45.99
2. Suppose Boyson Corporation’s projected
2. The Ramirez Company's last dividend was free cash flow for next year is FCF 1 =
$1.75. Its dividend growth rate is expected $150,000, and FCF is expected to grow at a
to be constant at 25% for 2 years, after constant rate of 6.5%. If the company’s
which dividends are expected to grow at a weighted average cost of capital is 11.5%,
rate of 6% forever. Its required return (r s) is what is the firm’s total corporate value?
12%. What is the best estimate of the a. $2,572,125
current stock price? b. $2,707,500
a. $41.58 c. $2,850,000
b. $42.64 d. $3,000,000
c. $43.71 e. $3,150,000
d. $44.80
e. $45.92 PERFERRED STOCK VALUATION
3. Ackert Company's last dividend was 1. Molen Inc. has an outstanding issue of
$1.55. The dividend growth rate is perpetual preferred stock with an annual
expected to be constant at 1.5% for 2 dividend of $7.50 per share. If the required
years, after which dividends are return on this preferred stock is 6.5%, at
expected to grow at a rate of 8.0% what price should the stock sell?
forever. The firm's required return (rs) is a. $104.27
12.0%. What is the best estimate of the b. $106.95
current stock price? c. $109.69
a. $37.05 d. $112.50
b. $38.16 e. $115.38
c. $39.30
2. Gupta Corporation is undergoing a e. $57.08
restructuring, and its free cash flows are
expected to vary considerably during the 5. You have been assigned the task of using
next few years. However, the FCF is the corporate, or free cash flow, model to
expected to be $65.00 million in Year 5, and estimate Petry Corporation's intrinsic value.
the FCF growth rate is expected to be a The firm's WACC is 10.00%, its end-of-year
constant 6.5% beyond that point. The free cash flow (FCF1) is expected to be $75.0
weighted average cost of capital is 12.0%. million, the FCFs are expected to grow at a
What is the horizon (or continuing) value (in constant rate of 5.00% a year in the future,
millions) at t = 5? the company has $200 million of long-term
a. $1,025 debt and preferred stock, and it has 30
b. $1,079 million shares of common stock
c. $1,136 outstanding. What is the firm's estimated
d. $1,196 intrinsic value per share of common stock?
e. $1,259 a. $40.35
b. $41.82
3. Misra Inc. forecasts a free cash flow of c. $43.33
$35 million in Year 3, i.e., at t = 3, and it d. $44.85
expects FCF to grow at a constant rate of e. $46.42
5.5% thereafter. If the weighted average
cost of capital (WACC) is 10.0% and the cost 6. Kedia Inc. forecasts a negative free cash
of equity is 15.0%, what is the horizon, or flow for the coming year, FCF 1 = -$10
continuing, value in millions at t = 3? million, but it expects positive numbers
a. $821 thereafter, with FCF2 = $25 million. After
b. $862 Year 2, FCF is expected to grow at a constant
c. $905 rate of 4% forever. If the weighted average
d. $950 cost of capital is 14.0%, what is the firm’s
e. $997 total corporate value, in millions?
a. $200.00
4. You must estimate the intrinsic value of b. $210.53
Noe Technologies’ stock. The end-of-year c. $221.05
free cash flow (FCF1) is expected to be d. $232.11
$27.50 million, and it is expected to grow at e. $243.71
a constant rate of 7.0% a year thereafter.
The company’s WACC is 10.0%, it has $125.0 7. Kale Inc. forecasts the free cash flows (in
million of long-term debt plus preferred millions) shown below. If the weighted
stock outstanding, and there are 15.0 average cost of capital is 11.0% and FCF is
million shares of common stock expected to grow at a rate of 5.0% after Year
outstanding. What is the firm's estimated 2, what is the firm’s total corporate value, in
intrinsic value per share of common stock? millions?
a. $48.64 Year 1 2
b. $50.67 Free cash flow -$50 $100
c. $52.78 a. $1,456
d. $54.89 b. $1,529
c. $1,606 e. 12.72%
d. $1,686
e. $1,770 2. Scanlon Inc.'s CFO hired you as a
consultant to help her estimate the
WEIGHTED AVERAGE COST OF CAPITAL cost of capital. You have been provided
with the following data: rRF = 4.10%;
COST OF PREFERRED RPM = 5.25%; and b = 1.30. Based on
the CAPM approach, what is the cost of
1. Bosio Inc.'s perpetual preferred stock equity from retained earnings?
sells for $97.50 per share, and it pays an a. 9.67%
$8.50 annual dividend. If the company b. 9.97%
were to sell a new preferred issue, it c. 10.28%
would incur a flotation cost of 4.00% of d. 10.60%
the price paid by investors. What is the e. 10.93%
company's cost of preferred stock for
use in calculating the WACC? 3. Assume that you are a consultant to
a. 8.72% Broske Inc., and you have been
b. 9.08% provided with the following data: D1 =
c. 9.44% $0.67; P0 = $27.50; and g = 8.00%
d. 9.82% (constant). What is the cost of equity
e. 10.22% from retained earnings based on the
DCF approach?
2. A company’s perpetual preferred stock a. 9.42%
currently sells for $92.50 per share, and b. 9.91%
it pays an $8.00 annual dividend. If the c. 10.44%
company were to sell a new preferred d. 10.96%
issue, it would incur a flotation cost of e. 11.51%
5.00% of the issue price. What is the
firm's cost of preferred stock? 4. Teall Development Company hired you
a. 7.81% as a consultant to help them estimate
b. 8.22% its cost of capital. You have been
c. 8.65% provided with the following data: D1 =
d. 9.10% $1.45; P0 = $22.50; and g = 6.50%
e. 9.56% (constant). Based on the DCF
approach, what is the cost of equity
COST OF R/E
from retained earnings?
1. O'Brien Inc. has the following data: r RF = a. 11.10%
5.00%; RPM = 6.00%; and b = 1.05. b. 11.68%
What is the firm's cost of equity from c. 12.30%
retained earnings based on the CAPM? d. 12.94%
a. 11.30% e. 13.59%
b. 11.64%
COST OF DEBT
c. 11.99%
d. 12.35%
1. To help finance a major expansion,
Castro Chemical Company sold a
noncallable bond several years ago that
now has 20 years to maturity. This bond
has a 9.25% annual coupon, sells at a
price of $1,075, and has a par value of WACC
$1,000. If the firm's tax rate is 40%, 1. You were hired as a consultant to
what is the component cost of debt for Giambono Company, whose target
use in the WACC calculation? capital structure is 40% debt, 15%
a. 8.49% preferred, and 45% common equity.
b. 8.59% The after-tax cost of debt is 6.00%, the
c. 8.69% cost of preferred is 7.50%, and the cost
d. 5.09% of retained earnings is 12.75%. The firm
e. 5.15% will not be issuing any new stock. What
COST OF NEW COMMON EQUITY is its WACC?
a. 8.98%
1. Trahan Lumber Company hired you to b. 9.26%
help estimate its cost of capital. You c. 9.54%
obtained the following data: D 1 = $1.25; d. 9.83%
P0 = $27.50; g = 5.00% (constant); and F e. 10.12%
= 6.00%. What is the cost of equity
raised by selling new common stock? 2. You were hired as a consultant to
a. 9.06% Quigley Company, whose target capital
b. 9.44% structure is 35% debt, 10% preferred,
c. 9.84% and 55% common equity. The interest
d. 10.23% rate on new debt is 6.50%, the yield on
e. 10.64% the preferred is 6.00%, the cost of
retained earnings is 11.25%, and the tax
2. Weaver Chocolate Co. expects to earn rate is 40%. The firm will not be issuing
$3.50 per share during the current year, any new stock. What is Quigley's
its expected dividend payout ratio is WACC?
65%, its expected constant dividend a. 8.15%
growth rate is 6.0%, and its common b. 8.48%
stock currently sells for $32.50 per c. 8.82%
share. New stock can be sold to the d. 9.17%
public at the current price, but a e. 9.54%
flotation cost of 5% would be incurred.
What would be the cost of equity from
new common stock?
a. 12.70%
b. 13.37%
c. 14.04%
d. 14.74%
e. 15.48%
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STOCKS AND THEIR VALUATION

CONSTANT GROWTH: FUTURE PRICES 2. Nachman Industries just paid a dividend

NONCONSTANT GROWTH VALUATION

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