Question

 1. A firm's Beta is 1.10. The historical S&P500 annual return of 8% should be used as the return on the market. The 3-month Treasury Bill Yield is 2%. Compute investor's required rate of return.

 a. 8%

 b. 6%

 c. 8.6%

 d. 6.6%

 2. A firm's current annual dividend is $2.15 per share and the expected growth rate is 3.4% per year in perpetuity. Investor's required rate of return is 11.2%. What is the estimated value of the stock using the Dividend Discount Growth Model?

 a. $27.56

 b. $19.85

 c. $19.20

 d. $28.50

 3. Investor's required rate of return is 11% and the current annual dividend is .76 per share. The dividend is expected to grow 10% per year for the next 3 years and then 5%

 per year in perpetuity. What is the estimated stock value?

 a. $21.53

 b. $15.18

 c. $2.94

 d. $18.59

 4. A firm's current annual dividend is $1.67 per share and is expected to grow 5% per year in perpetuity. The current stock market price is $44 per share. What is the market's required rate of return on this stock?

 a. 5%

 b. 3.99%

 c. 8.80%

 d. 8.99%

 5. A firm's current free cash flow is $85,000,000 and its investor's required rate of return is 10% with no growth expected in perpetuity. What is the firm's estimated value?

 a. $85,000,000

 b. $8,500,000

 c. $850,000,000

 d. $o

 6. A company paid an annual dividend of $.67 per share in 2018. The firm is expected to increase its dividend in 2019 and beyond by 2.50%. If you paid $21.95 per share for the stock in 2017, what is your dividend yield for 2019?

 a. 3.05%

 b. 3.14%

 c. 2.96%

 d. 2.50%

 7. A firm's stock price is $36.25 per share and its most recent annual earnings per share is $2.98. If the firm's PE ratio increases by 10% and its earnings per share increase by 7%, what is the firm's new stock price per share?

 a. $13.38

 b. $13.02

 c. $39.67

 d. $42.67

Answer 1

1.Required Rate of return = risk free rate + beta*(Market Return – Risk free return)

= 2% + 1.10(8%-2%)

= 8.6%

i.e. c

2.Value of stock = Expected Dividend/(Required return – growth rate)

= 2.15(1.034)/(11.2%-3.4%)

= $28.50

i.e. d

3.Stock Value is equal to present value of all future dividends

= 0.76(1.1)/(1.11) + 0.76(1.1)²/(1.11)² + 0.76(1.1)³/(1.11)³ + 0.76(1.1)³(1.05)/(11%-5%)(1.11)³

= $15.18

i.e. b

4.44 = 1.67(1.05)/(Required return – 5%)

Required Return = 8.99%

i.e. d

5.Firm Value = 85,000,000/10%

= 850,000,000

i.e. c

6.Dividend Yield = Expected Dividend/Current price

= 3.05%

i.e. a

7.EPS = 2.98(1.07) = 3.1886

Share price = EPS*P/E ratio

= 3.1886*13.3808

= $42.67

i.e. d