# review exam

**Topics:**Net present value, Preferred stock, Dividend yield

**Pages:**18 (4259 words)

**Published:**October 13, 2014

Practice Problems

Expected dividend yieldAnswer: a EASY

i.If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected dividend yield for the coming year?

a.5.0%

b.6.0%

c.7.0%

d.8.0%

e.9.0%

Expected return, dividend yield, and capital gains yieldAnswer: e EASY ii.If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected capital gains yield for the coming year?

a.5.2%

b.5.4%

c.5.6%

d.5.8%

e.6.0%

Expected total returnAnswer: d EASY

iii.If D0 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected total return for the coming year?

a.9.8%

b.10.3%

c.10.8%

d.11.3%

e.11.8%

Constant growth valuationAnswer: b EASY

iv.A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price?

a.$15.00

b.$17.50

c.$20.00

d.$22.50

e.$25.00

Preferred stock valuationAnswer: d EASY

v.Mark Walker Inc plans to issue preferred stock with a perpetual annual dividend of $2 per share and a par value of $25. If the required return on this stock is currently 8%, what should be the stock’s market value?

a.$22.00

b.$23.00

c.$24.00

d.$25.00

e.$26.00

Constant growth rateAnswer: b EASY

vi.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%

Future price of a constant growth stockAnswer: e EASY

vii.P. Daves Inc's stock is currently sells for $45 per share. The stock’s dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, rs, is 12%. What is Daves' expected price 6 years from now?

a.$52.68

b.$53.71

c.$54.41

d.$55.12

e.$56.94

Constant growth valuation; CAPMAnswer: e MEDIUM

viii.The Corrigan Company just paid a dividend of $1 per share, 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.$19.25

b.$21.00

c.$22.75

d.$24.50

e.$26.25

Preferred required returnAnswer: c MEDIUM

ix.A share of preferred stock pays a quarterly dividend of $1.00. If the price of the stock is $50, what is the effective annual (not nominal) rate of return on the preferred stock?

a.7.88%

b.8.01%

c.8.24%

d.8.47%

e.8.70%

Preferred stock valueAnswer: d

x.Johnston Corporation is growing at a constant rate of 6% per year. The cost of preferred stock (rp) is 8%. The par value of the preferred stock is $120, and the stock has a stated dividend of 10% of par. What is the market value of the preferred stock?

a.$125

b.$120

c.$175

d.$150

e.$200

Constant growth dividendAnswer: d MEDIUM

xi.Wald Inc's stock has a required rate of return of 10%, and it sells for $40 per share. Wald's dividend is expected to grow at a constant rate of 7% per year. What is the expected year-end dividend, D1?

a.$0.90

b.$1.00

c.$1.10

d.$1.20

e.$1.30

Future price of a constant growth stockAnswer: b MEDIUM

xii.Bettis Corp.’s stock price is $20 per share, and its expected year-end dividend is $2 a share (D1 = $2.00). The stock’s required return is 15%, and the dividend is expected to grow at a constant rate forever. What is the expected price of the stock 7 years from now?

a.$27.18

b.$28.14

c.$29.95

d.$30.45

e.$31.81

Corporate valuation modelAnswer: a MEDIUM

xiii.You have been assigned the task of using the corporate valuation model to estimate Meric Corporation's the intrinsic value. Meric’s...

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