Exam 15: Options Markets

Mature Products Corporation produces goods that are very mature in their product life cycles.Mature Products Corporation is expected to pay a dividend in year 1 of $2.00,a dividend of $1.50 in year 2,and a dividend of $1.00 in year 3.After year 3,dividends are expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth ________.

Civil Engineering Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock of Civil Engineering Corporation has a beta of 1.2.What is the intrinsic value of Civil Engineering's stock?

Dominion Tool Company is expected to pay a dividend of $2 in the upcoming year.The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.Analysts expect the price of Dominion Tool Company shares to be $22 a year from now.The beta of Dominion Tool Company's stock is 1.25.What is the intrinsic value of Dominion's stock today?

If the expected ROE on reinvested earnings is equal to k,the multistage DDM reduces to

Demand-side economics is concerned with _______.

The price/earnings ratio,or multiplier approach,may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.

Suppose that the average P/E multiple in the oil industry is 16.Mobil Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Mobil Oil stock should be ____.

The ______ is a common term for the market consensus value of the required return on a stock.

Assume that the Bank of Canada decreases the money supply.This action will cause ________ to decrease.

Extremely high P/E multiples have been observed in the market in recent years,especially for technology firms. • How can you explain the fact that firms with very low earnings or no earnings are valued in the market as being worth billions of dollars? • How do these firms' values fit the dividend discount model? • What factors would be likely to influence the market's evaluation of these firms?

If a firm's required rate of return equals the firm's return on equity,there is no advantage to increasing the firm's growth.Suppose a no-growth firm had a required rate of return and a ROE of 12% and a stock price of $40.However,if the firm is able to increase the ROE to 15% with a plowback ratio of 50%,what is the present value of growth opportunities now? (Last year's dividends were $2.00/share).

Two firms,A and B,both produce widgets.The price of widgets is $1 each.Firm A has total fixed costs of $500,000 and variable costs of 50 cents per widget.Firm B has total fixed costs of $240,000 and variable costs of 75 cents per widget.The corporate tax rate is 40%.If the economy is strong,each firm will sell 1,200,000 widgets.If the economy enters a recession,each firm will sell 1,100,000 widgets.If the economy enters a recession,the after-tax profit of Firm A will be

The growth in dividends of XYZ,Inc.is expected to be 10%/year for the next two years,followed by a growth rate of 5%/year for three years;after this five year period,the growth in dividends is expected to be 2%/year,indefinitely.The required rate of return on XYZ,Inc.is 12%.Last year's dividends per share were $2.00.What should the stock sell for today?

Two firms,A and B,both produce widgets.The price of widgets is $1 each.Firm A has total fixed costs of $500,000 and variable costs of 50 cents per widget.Firm B has total fixed costs of $240,000 and variable costs of 75 cents per widget.The corporate tax rate is 40%.If the economy is strong,each firm will sell 1,200,000 widgets.If the economy enters a recession,each firm will sell 1,100,000 widgets.If the economy enters a recession,the after-tax profit of Firm B will be

Assume the government were to decide to increase the budget deficit.This action will most likely cause __________ to increase

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has ________.

Which of the following would tend to reduce a firm's P/E ratio?

Agricultural Equipment Company has an expected ROE of 10%.The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

Discuss the Gordon,or constant discounted dividend,model of common stock valuation.Include in your discussion the advantages,disadvantages,and assumptions of the model.

According to Peter Lynch,a rough rule of thumb for security analysis is that