CHAPTER 5- VALUING STOCKS
1.
A stock paying $5 in annual dividends sells now for $80 and has an expected return of
14%. What might investors expect to pay for the stock one year from now?
A)
$82.20
B)
$86.20
C)
$87.20
D)
$91.20
Answer: B Difficulty: Medium Page: 139, 1st paragraph.
Expected return
14%
=
=
Div1  P1  Po
Po
$5  P1 $80
$80
$11.20 = P1 – $75
$86.20 = P1
2.
What should be the price for a common stock paying $3.50 annually in dividends if the
growth rate is zero and the discount rate is 8%?
A)
$22.86
B)
$28.00
C)
$42.00
D)
$43.75
Answer: D Difficulty: Medium Page: 144, 1st paragraph.
Div 3.50

 $43.75
Po =
r
.08
3.
What constant growth rate in dividends is expected for a stock valued at $32.00 if next
year’s dividend is forecast at $2.00 and the appropriate discount rate is 13%?
A)
5.00%
B)
6.25%
C)
6.75%
D)
15.38%
Answer: C Difficulty: Medium Page: 145, 1st paragraph.
2.00
$32.00 =
.13  g
$4.16 – 32g
= $2.00
$2.16 = 32 g
.0675 = g
6.75% = g
4.
If next year’s dividend is forecast to be $5.00, the constant growth rate is 4%, and the
discount rate is 16%, then the current stock price should be:
A)
$31.25
B)
$40.00
C)
$41.67
D)
$43.33
Answer: D Difficulty: Medium Page: 145, 1st paragraph.
$5.00
Po =
.16.04
$5.00
$41.67 =
.12
5.
ABC common stock is expected to have extraordinary growth of 20% per year for two
years, at which time the growth rate will settle into a constant 6%. If the discount rate
is 15% and the most recent dividend was $2.50, what should be the current share
price?
A)
$31.16
B)
$33.23
C)
$37.42
D)
$47.77
Answer: C Difficulty: Hard Page: 148, 2nd paragraph.
$2.50(1.2) $2.50(1.2)2 2.50(1.2)2 (1.06)
Po =


1.15
1.152
(.15.06)(1.15)2
=
$3.00
1.15

$3.60
1.3225

$3.82
.09(1.3225)
= $2.61 + 2.72 + 32.09
= $37.42
6.
What is the plowback ratio for a firm that has earnings per share of $12.00 and pays
out $4.00 per share as dividends?
A)
25.00%
B)
33.33%
C)
66.67%
D)
75.00%
Answer: C Difficulty: Medium Page: 149, 4th paragraph.
plowback
= 1 - payout ratio
$4.00
=1–
$12.00
= 1 – .33
 .67
7.What price would you expect to pay for a stock with 13% required rate of return, 4% rate of
dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
A) $27.78
B) $30.28
C) $31.10
D) $31.39
Answer: D Difficulty: Hard Page: 145, 1st paragraph.
Po
= Do +
= $2.50 +
= $2.50 +
D1
kg
$2.50(1.04)
.13 .04
$2.60
.09
= $2.50 + $28.89
= $31.39
8.What rate of return is expected from a stock that sells for $30 per share, pays $1.50
annually in dividends, and is expected to sell for $33 per share in one year?
A) 5.00%
B) 10.00%
C) 14.09%
D) 15.00%
Answer: D Difficulty: Medium Page: 145, 1st paragraph.
DIV P1  Po
Expected Return
=

Po
Po
=
=
=
1.50 33.00  30.00

30.00
30.00
.05 + .10
.15 = 15%