Chapter 18 Equity Valuation Models
61. Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are
expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of low Fly Airline has a beta of 3.00. The intrinsic value of the stock is ______.
A) $46.67 B) $50.00 C) $56.00 D) $62.50 E) none of the above
Answer: A Difficulty: Moderate
Rationale: 6% + 3(14% - 6%) = 30%; P = 7 / (.30 - .15) = $46.67.
62. Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year.
Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is _______.
A) $10.71 B) $15.00 C) $17.75 D) $25.00 E) none of the above
Answer: D Difficulty: Moderate
Rationale: 6% + 0.75(14% - 6%) = 12%; P = 1.50 / (.12 - .06) = $25.
63. Low Tech Chip Company is expected to have EPS in the coming year of $2.50. The
expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be
A) $22.73 B) $27.50 C) $28.57 D) $38.46 E) none of the above
Answer: D Difficulty: Difficult
Rationale: g = 14% X 0.6 = 8.4%; Expected DPS = $2.50(0.4) = $1.00; P = 1 / (.11
- .084) = $38.46.
438
Chapter 18 Equity Valuation Models
Use the following to answer questions 64-65:
Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00.
64. What is the market capitalization rate for Risk Metrics? A) 13.6% B) 13.9% C) 15.6% D) 16.9% E) none of the above
Answer: B Difficulty: Moderate
Rationale: k = 3.50 / 90 + .10; k = 13.9%
65. What is the approximate beta of Risk Metrics's stock? A) 0.8 B) 1.0 C) 1.1 D) 1.4 E) none of the above
Answer: C Difficulty: Difficult
Rationale: k = 13.9% from 18.64; 13.9 = 5% + b(13% - 5%) = 1.11.
66. The market capitalization rate on the stock of Flexsteel Company is 12%. The expected
ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be _________.
A) 7.69 B) 8.33 C) 9.09 D) 11.11 E) none of the above
Answer: C Difficulty: Difficult
Rationale: g = 13% X 0.5 = 6.5%; .5/(.12-.065) = 9.09
439
Chapter 18 Equity Valuation Models
67. The market capitalization rate on the stock of Flexsteel Company is 12%. The expected
ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 75%, the P/E ratio will be ________.
A) 7.69 B) 8.33 C) 9.09 D) 11.11 E) none of the above
Answer: D Difficulty: Difficult
Rationale: g = 13% X 0.75 = 9.75%; .25/(.12-.0975) = 11.11
68. The market capitalization rate on the stock of Fast Growing Company is 20%. The
expected ROE is 22% and the expected EPS are $6.10. If the firm's plowback ratio is 90%, the P/E ratio will be ________.
A) 7.69 B) 8.33 C) 9.09 D) 11.11 E) 50
Answer: E Difficulty: Difficult
Rationale: g = 22% X 0.90 = 19.8%; .1/(.20-.198) = 50
440
Chapter 18 Equity Valuation Models
69. J.C. Penney Company is expected to pay a dividend in year 1 of $1.65, a dividend in
year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.
A) $33.00 B) $40.67 C) $77.53 D) $66.00 E) none of the above
Answer: C Difficulty: Difficult
Rationale:
Calculations are shown in the table below. Yr Dividend PV of Dividend @ 11% 1 $1.65 $1.65/(1.11) = $1.4865 2 $1.97 $1.97/(1.11)2 = $1.5989 3 $2.54 $2.54/(1.11)3 = $1.8572 Sum $4.94
P3 = $2.54 (1.08) / (.11-.08) = $91.44; PV of P3 = $91.44/(1.08)3 = $72.5880; PO = $4.94 + $72.59 = $77.53.
70. Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend
in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.
A) $33.00 B) $39.86 C) $55.00 D) $66.00 E) $40.68
Answer: E Difficulty: Difficult
Rationale:
Calculations are shown in the table below. Yr Dividend PV of Dividend @ 14% 1 $1.20 $1.20/1.14 = $1.0526 2 $1.50 $1.50/(1.14)2 = $1.1542 3 $2.00 $2.00/(1.14)3 = $1.3499 Sum $3.56
P3 = 2 (1.10) / (.14-.10) = $55.00; PV of P3 = $55/(1.14)3 = $37.12; PO = $3.56 + $37.12 = $40.68.
441
Chapter 18 Equity Valuation Models
71. Antiquated Products Corporation produces goods that are very mature in their product
life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3. After year 3, dividends are expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth ______. A) $8.49 B) $10.57 C) $20.00 D) $22.22 E) none of the above
Answer: A Difficulty: Difficult
Rationale:
Calculations are shown below.
Yr. Dividend PV of Dividend @ 8% 1 $1.00 $1.00/(1.08) = $0.9259 2 $0.90 $0.90/(1.08)2 = $0.7716 3 $0.85 $0.85/(1.08)3 = $0.6748 Sum $2.3723
P3 = 0.85 (.98) / [.08 - (-.02)] = $8.33; PV of P3 = $8.33/(1.08)3 = $6.1226; PO = $6.1226 + $2.3723 = $8.49.
442
百度搜索“77cn”或“免费范文网”即可找到本站免费阅读全部范文。收藏本站方便下次阅读，免费范文网，提供经典小说综合文库投资学第7版Test Bank答案18(5)在线全文阅读。
相关推荐：