Exam 8: Valuing Stocks

P/E Model and Cash Flow Valuation Suppose that a firm's recent earnings per share and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

Buying Stock with a Market Order You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24, respectively. You place a market buy-order for 100 shares that executes at these quoted prices. How much money did it cost to buy these shares?

To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________.

Dividend Growth Annual dividends of Wal-Mart Stores (WMT) grew from $0.23 in 2000 to $0.83 in 2007. What was the annual growth rate?

Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7% versus 8%?

Stock Index Performance On November 27, 2007, The Dow Jones Industrial Average closed at 12,958.44, which was up 215.04 that day. What was the return (in percent) of the stock market that day?

Which of the following is incorrect with respect to preferred stock?

Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in 2 years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

Consider a firm that had been priced using a 12 percent growth rate and a 16 percent required return. The firm recently paid a $5.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate. How much should the stock price change (in dollars and percentage)?

All of the following are stock market indices except _________________.

The Dow Jones Industrial Average (DJIA) includes

A firm's stock is selling at $95.00 per share. Its growth rate is 10% and investors demand 15% on this stock. What is the firm's expected dividend?

A fast growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a rate of 30% rate for the next 4 years. Afterwards, a more stable 7% growth rate can be assumed. If a 10% discount rate is appropriate for this stock, what is its value?

Consider two firms with the same P/E ratio. Explain how one could be described as expensive compared to the other.

Value a Constant Growth Stock Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.49. What is the value of their stock when the required rate of return is 14.13 percent?

Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place

Financial analysts forecast ABC Inc. growth for the future to be 12%. ABC's recent dividend was $1.60. What is the value of ABC stock when the required return is 15%?

Explain how the difference in the bid and ask prices might be considered a hidden cost to the investor.