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Question(s) / Instruction(s):

A firm's liquidation value is the amount:

1. necessary to repurchase all shares of common stock.

2. realized from selling all assets and repaying debts.

3. a purchaser would pay for the firm in bankruptcy.

4. equal to the book value of equity.

 

Suppose Sue’s Dynamic Ice Cream Stand (DIC) went public last year. DIC’s current dividend is $2 (which was just paid out), and is expected to grow at 3% for the next 2 years. DIC’s analyst believes the stock price will be $31.22 two years from now. What is DIC’s current stock price if its discount rate is 10%?

1. $26.18

2. $32.60

3. $35.40

4. $29.43

5. None of the above

 

The dividend discount model does not hold for investors who have a preference for capital gains.

1. True

2. False

 

Common stock can be valued using the perpetuity valuation formula if the:

1. discount rate is expected to remain constant.

2. dividends are not expected to grow.

3. growth rate in dividends is not constant.

4. investor does not intend to sell the stock.

 

Suppose Sue’s Dynamic Ice Cream Stand (DIC) went public last year. DIC’s current dividend is $2, and is expected to grow at 3% forever. What is DIC’s current stock price if its required return is 10%?

1. $29.43

2. $28.57

3. $31.43

4. $20.00

5. Cannot be determined

 

What is the constant growth rate of a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13%?

1. 5.00%

2. 6.25%

3. 6.75%

4. 15.38%

 

The expected return on a common stock is composed of:

1. dividend yield.

2. capital appreciation.

3. earning yield.

4. none of the above

 

How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

1. $43.10

2. $45.00

3. $45.45

4. $47.00

 

Which of the following statements are correct regarding the present value of a stock?

1. The rate of return that stockholders expect over the next year is defined as the expected dividend per share DIV1 plus the expected increase in price (P1 – P0), all divided by the price at the start of the year P0.

2. Unlike the fixed interest payments that the firm promises to bondholders, the dividends that are paid to stockholders depend on the fortunes of the firm. That's why a company's common stock is riskier than its debt.

3. The return that investors expect on any one stock is also the return that they demand on all stocks subject to the same degree of risk. The present value of a stock equals the present value of the forecast future dividends and future stock price, using that expected return as the discount rate.

4. All of the above

 

A payout ratio of 35% for a company indicates that:

1. 35% of dividends are plowed back for growth.

2. 65% of dividends are plowed back for growth.

3. 35% of earnings are paid out as dividends.

4. 65% of earnings are paid out as dividends.

 

JetHair earnings are $3 per share. The firm’s ROE is 15% and its plowback ratio is 25%.

What is JetHair’s sustainable growth rate?

1. 6.75%

2. 11.25%

3. 3.75%

4. 4.50%

 

JetHair’s earnings are $3 per share. The firm’s ROE is 15% and its plowback ratio is 25%. What is JetHair’s dividend for next year if its required rate of return is 20%?

1. $0.75

2. $2.25

3. $2.33

4. $0.78

 

JetHair’s earnings are $3 per share. The firm’s ROE is 15% and its plowback ratio is 25%. What is JetHair’s stock price if its required rate of return is 20%?

1. $14.37

2. $4.79

3. $18.46

4. $19.15

 

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