Exam 8: Equity Valuation

Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5 percent next year, 15 percent in year two, and 25 percent in year 3. After that growth is expected to level off to a constant growth rate of 10 percent per year. The required rate of return is 15 percent. Calculate the intrinsic value using the multistage model.

Quality financial statements are a good reflection of reality; accounting tricks and one-time changes are not used to make the firm appear stronger than it really is.

What is the value of a preferred stock that has a par value of $100, a required rate of return of 11 percent, and pays a 7 percent annual dividend?

The growth rate of equity earnings without external financing is equal to

Ross Corporation paid dividends per share of $1.20 at the end of 1990. At the end of 2000, it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.

The real risk-free rate depends on the real growth in the economy and can be affected for short time periods by temporary tightness or ease in the capital markets.

Using the constant growth model, a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to

The three-step valuation process consists of (1) analysis of alternative economies and markets, (2) analysis of alternative industries, and (3) analysis of industry influences.

Those who employ the bottom-up approach start their search immediately at the company level.

The two components that are required in order to carry out asset valuation are (1) the stream of expected cash flows and (2) the required rate of return.

An example of a relative valuation technique is the Price/Cash Flow ratio.

Within a specific market, the top-down analyst then searches for the best industries.

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

In 2018, Swisten Inc. issued a $150 par value preferred stock that pays an 8 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 15 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8 percent per year for the next five years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent. -Refer to Exhibit 8.3. The future price of the stock in year 5 is

In 2018, Venus Fly Co. issued a $75 par value preferred stock that pays a 7 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

A company's dividend last year was $3.00. Dividends are expected to grow indefinitely at 7 percent, and the required rate of return for the stock is 13 percent. What is the value of the stock today?

Net margins are defined as

An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

A fair investment is one that gives us a return that is greater than the risk.