Question 1

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

Accepted Answer

A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50 
E) none of the above

Question 2

Many stock analysts assume that a mispriced stock will

Accepted Answer

A) immediately return to its intrinsic value. 
B) return to its intrinsic value within a few days. 
C) never return to its intrinsic value. 
D) gradually approach its intrinsic value over several years. 
E) none of the above.

Question 3

A company paid a dividend last year of $1.75.The expected ROE for next year is 14.5%.An appropriate required return on the stock is 10%.If the firm has a plowback ratio of 75%,the dividend in the coming year should be

Accepted Answer

A) $1.80 
B) $2.12 
C) $1.77 
D) $1.94 
E) none of the above

Question 4

Sure 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-The market's required rate of return on Sure's stock is _____.

Accepted Answer

A) 14.0% 
B) 17.5% 
C) 16.5% 
D) 15.25% 
E) none of the above

Question 5

Sure 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-If Sure's intrinsic value is $21.00 today,what must be its growth rate?

Accepted Answer

A) 0.0% 
B) 10% 
C) 4% 
D) 6% 
E) 7%

Question 6

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding.SI's required return on equity is 11.3% and WACC is 9.8%.If FCFE is expected to grow at 7.0% forever,the intrinsic value of SI's shares are ____________.

Accepted Answer

A) $108.00 
B) $68.29 
C) $244.42 
D) $14.76 
E) none of the above

Question 7

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year .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

Accepted Answer

A) $22.73 
B) $27.50 
C) $28.57 
D) $38.46 
E) none of the above

Question 8

Lamm Corporation is expected have EBIT of $6.2M this year.Lamm Corporation is in the 40% tax bracket,will report $1.2M in depreciation,will make $1.4M in capital expenditures,and have a $160,000 increase in net working capital this year.What is Lamm's FCFF?

Accepted Answer

A) 6,200,000 
B) 6,160,000 
C) 3,360,000 
D) 3,680,000 
E) 4,625,000

Question 9

A firm has a return on equity of 14% and a dividend payout ratio of 60%.The firm's anticipated growth rate is _________.

Accepted Answer

A) 5.6% 
B) 10% 
C) 14% 
D) 20% 
E) none of the above

Question 10

A preferred stock will pay a dividend of $3.00 in the upcoming year,and every year thereafter,i.e.,dividends are not expected to grow.You require a return of 9% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Accepted Answer

A) $33.33 
B) $0.27 
C) $31.82 
D) $56.25 
E) none of the above

Question 11

High Tech Chip Company is expected to have EPS in the coming year of $2.50.The expected ROE is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 70%,the growth rate of dividends should be

Accepted Answer

A) 5.00% 
B) 6.25% 
C) 6.60% 
D) 7.50% 
E) 8.75%

Question 12

Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Fools Gold Mining Company has a beta of -0.25.The return you should require on the stock is ________.

Accepted Answer

A) 2% 
B) 4% 
C) 6% 
D) 8% 
E) none of the above

Question 13

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.

Accepted Answer

A) $23.91 
B) $24.11 
C) $26.52 
D) $27.50 
E) none of the above

Question 14

Which of the following is the best measure of the floor for a stock price?

Accepted Answer

A) Book value 
B) Liquidation value 
C) Replacement cost 
D) Market value 
E) Tobin's Q

Question 15

Torque 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 Torque Corporation has a beta of 1.2.
-What is the intrinsic value of Torque's stock?

Accepted Answer

A) $14.29 
B) $14.60 
C) $12.33 
D) $11.62 
E) none of the above

Question 16

An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 22,then it would be reasonable to assume the expected EPS of IBM in the coming year is ______.

Accepted Answer

A) $3.64 
B) $4.44 
C) $14.40 
D) $22.50 
E) none of the above

Question 17

The _________ is the fraction of earnings reinvested in the firm.

Accepted Answer

A) dividend payout ratio 
B) retention rate 
C) plowback ratio 
D) A and C 
E) B and C

Question 18

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20,per share FCFE in year 2 of $1.50,and per share FCFE in year 3 of $2.00.After year 3,per share FCFE is 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.

Accepted Answer

A) $33.00 
B) $40.68 
C) $55.00 
D) $66.00 
E) $12.16

Question 19

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 ________.

Accepted Answer

A) 7.69 
B) 8.33 
C) 9.09 
D) 11.11 
E) none of the above

Question 20

Torque 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 Torque Corporation has a beta of 1.2.
-What is the return you should require on Torque's stock?

Accepted Answer

A) 12.0% 
B) 14.6% 
C) 15.6% 
D) 20% 
E) none of the above

Exam 18: Option Valuation