CHAPTER 9

STOCKS AND THEIR VALUATION

1, If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stocks expected
dividend yield for the coming year?
a.
b.
c.
d.
e.

5.0%
6.0%
7.0%
8.0%
9.0%

4, If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stocks expected total
return for the coming year?
a.
b.
c.
d.
e.

10.8%
11.0%
11.2%
11.4%
11.6%

10, Hahn Manufacturing is expected to pay a dividend of $1.00 per share at the end of the
year (D1 = $1.00). The stock sells for $40 per share, and its required rate of return is
11%. The dividend is expected to grow at a constant rate, g, forever. What is Hahn's
expected growth rate?
a. 8.00%
b. 8.50%
c. 9.00%
d. 9.50%
e. 10.00%
13, The Lashgari Company is expected to pay a dividend of $1 per share at the end of the
year, and that dividend is expected to grow at a constant rate of 5% per year in the
future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free
rate is 3%. What is the company's current stock price?
a.
b.
c.
d.
e.

$15.00
$20.00
$25.00
$30.00
$35.00

18, Keys Inc's stock has a required rate of return of 10%, and it sells for $40 per share. Keys'
dividend is expected to grow at a constant rate of 7% per year. What was Keys' last
dividend, D0?

a.
b.
c.
d.
e.

$1.12
$1.24
$1.36
$1.48
$1.60

22, Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a
surge in the demand for motor homes. The company expects earnings and dividends
to grow at a rate of 20% for the next 4 years, after which there will be no growth (g =
0) in earnings and dividends. The companys last dividend, D0, was $1.50. MHIs
beta is 1.5, the market risk premium is 6%, and the risk-free rate is 4%. What is the
current price of the common stock?

e.

a. $17.51
b. $19.63
c. $21.66
d. $23.57
$25.87

57, You plan to buy a share of XYZ stock today and to hold it for 2 years. Your do not
expect to receive a dividend at the end of Year 1, but you will receive a dividend of
$9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the
end of Year 2. If your expected rate of return is 16%, how much should you be
willing to pay for this stock today?
a.
b.
c.
d.
e.

$164.19
$ 75.29
$107.53
$118.35
$131.74

59, Allegheny Publishings stock is expected to pay a year-end dividend, D1, of $4.00. The
dividend is expected to grow at a constant rate of 8% per year, and the stocks
required rate of return is 12%. Given this information, what is the expected price of
the stock, eight years from now?
a.
b.
c.
d.
e.

$200.00
$185.09
$171.38
$247.60
$136.86

74, You are given the following data:

The risk-free rate is 5%.

The required return on the market is 8%.

The expected growth rate for the firm is 4%.
The last dividend paid was $0.80 per share.
Beta is 1.3.

Now assume the following changes occur:

The inflation premium drops by 1%.
An increased degree of risk aversion causes the required return on the market to
rise to 10% after adjusting for the changed inflation premium.
The expected growth rate increases to 6%.
Beta rises to 1.5.
What will be the change in price per share, assuming the stock was in equilibrium
before the changes occurred?
a.
b.
c.
d.
e.

+$12.11
-$ 4.87
+$ 6.28
-$16.97
+$ 2.78