Chapter 8, stock valuation and market efficiency PDF

Preview

Summary

Chapter questions, solutions and the formulas used if necessary....

Description

1. Shares of Luna Sea Hotels Inc. currently sell for $44.42. Yesterday, Luna Sea paid a dividend of $0.81 per share. Assume that the growth rate of dividends will be 7.7% and that dividends will grow at a constant rate forever. Given !this, what is the implicit return of the !stock? a. b. c. d.

11.58%" 10.50%" 8.56%" 9.70%

2. The next dividend for ABC Corp. is expected to be $1.26. It will rise to $2.17 the next year and grow at a constant 5.9% from then on. The required return is 11.7%. What is the current price of the !stock? a. b. c. d.

$39.47" $34.62 $36.58" $32.45"

3. Suppose you have some extra money to invest for 1 year. After a !year, you will need to sell your investment to pay tuition. After listening to!Bloomberg , you decide that you want to buy Intel Corp. stock. You call your broker and find that Intel is currently selling for $50.96 per share and pays!$0.15 per year in dividends. The analyst on!Bloomberg!predicts that the stock will be selling for!$59.50 in 1 year. Assume that you would be satisfied to earn 11.9%. What is the current value of the stock based on the dividend pricing model? a. b. c. d.

$53.31 $54.58" $51.56" $55.85"

4. Analysts expect Sturk Industries to make payouts of $4.825 billion at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that !Sturk's payouts will grow at 4.5 % in perpetuity. Sturk stockholders require a return of 9 %. Sturk has 0.95 billion shares outstanding. What is the fair price for !Sturk's shares !today? a. $114.59" b. $112.87 c. $110.58" d. $116.78" " 5. What is the return on equity if!D1=$1.28 ,!P0=$9.25, and!g=3.9% ? a. b. c. d.

17.92%" 17.50%" 18.25%" 17.14%

6. When would you most likely use the P/E ratio approach to stock valuation?" a. when a firm does not pay dividends such as for privately held companies b. when stock prices are usually volatile" c. when conducting ratio analysis of a company since the P/E ratio would be computed anyway" d. when evaluating publicly held companies with stable dividend payouts" 7. If investors require an 8% return, and the preferred stock pays an annual !end-of-year dividend of $6.75 , what is the market price per !share? a. b. c. d.

$84.20" $83.75" $84.38 $83.98"

8. Teal Corp. has been having trouble. The last dividend was $2.86 , and !it's projected to fall 3% per year indefinitely. If the required return is 6% , what is Teal !Corp.'s stock !price? a. b. c. d.

$31.02" $30.52" $30.60" $30.82

9. Company !A's common stock recently paid a dividend of $1.00. The next dividend is expected to be $1.02. If the required return is 9% , what is the estimated value of the common !stock? a. b. c. d.

$13.52" $14.10" $14.50 $15.15"

10. A long position in a stock is all of the following except (select the best choice below): a. b. c. d.

used to take advantage of expected declines in a stock's price provides a loss when the stock falls" provides a profit when the stock rises" the most common way to buy stock"

11. What is the price of a share of stock if the beta is !1.5, its next dividend is projected to be $2.50 ,!and its growth rate is expected to be a constant 9% , assuming the market return is 13% and the !risk-free rate is 6% ? a. b. c. d.

$33.33 $34.54" $35.21" $36.89"

12. Which of the following is not true about stock? Select the best choice below." a. b. c. d.

Only public companies can issue stock. You will find stock shares selling in both the primary and secondary markets" You will find stock shares selling in both the primary and secondary markets" Stock can be sold in an initial public offering."

13. Shares of !S&M Family Outlet Inc. trade on the NYSE !(NYSE: S&M). The shares traded today at a price of!$15.88. Yesterday, S&M paid a dividend of $1.09 per share. The next dividend is expected in one !year's time. If investors require a 9% return and if the dividends are expected to grow at a constant rate !forever, what growth rate is currently priced into the shares?" The implicit growth rate of the stock is:" a. b. c. d.

2.8%" 2.0% 1.4%" 3%"

14. Stock is all of the following except (select the best choice below): a. b. c. d.

a security that may be purchased on margin" a security traded on both the primary and secondary markets" representative of an equity interest in a company" a seasoned issue

15. Bearsbum Confection is experiencing declining !world-wide sales of its number one !confection, the petit ourson. It announced today that it is suspending dividends and stock repurchases and will resume them in two years. Analysts expect that total payouts will be $2.3 billion in two years and that payouts will continue to be paid annually thereafter in !perpetuity, growing at a rate of 1.8%. Bearsbum has 443 million shares outstanding and its investors require a return of 7.2%. What is the fair price for the shares!today? a. b. c. d.

$96.45" $98.50" $89.68" $92.58"

16. Which of the following is NOT a characteristic of preferred stock? a. b. c. d.

Common stock dividends must be paid before preferred dividends. Preferred dividends are typically given less legal priority than bond interest payments." Preferred stock does not mature like a bond." Preferred stock dividends may be delayed."

17. According to the efficient market theory, whenever investors find that the required return of a stock is less than its expected return, they'll buy the stock. This will a. b. c. d.

not affect the price." drive up the price. cause the market to crash." drive down the price."

18. Select the best choice below. The reason why investors may think that the markets operate efficiently is because a. very intelligent, well-informed, and educated people in key positions work to keep prices correct at all times." b. many investors are looking for the same thing, a good deal. When one is found they will either buy or sell it until the good deal disappears, thus driving it back to its correct price. c. most investors react slowing to the release of information allowing the markets to buffer and correct for misinformation." d. if a security is mispriced, investors will avoid it until the price corrects." 19. Sirius Cybernetics faces tough competition from Cyberdyne systems. Sirius has decided to suspend payouts and instead invest the cash in !R&D. Sirius makes its payouts annually at the end of each year. Today is the first day of a new year. Sirius has announced no payouts at the end of this year or next year. Payouts will resume three years from yesterday and analysts expect it will pay dividends of $1.445 billion !(in aggregate) and repurchase $4.055 billion worth of shares. In the years !following, analysts expect payouts to grow in perpetuity at 5 % per annum. Stockholders require a return of 9 % and there are 1.23 billion shares outstanding. What is the fair price for !Sirius's shares !today? a. b. c. d.

$95.10" $94.09 $93.25" $90.52"

20. Bryson Industries paid $2.95 per share in dividends yesterday. Its dividends are expected to grow steadily at 6% per year. If the required return is 6.3% , what is the current price (P0 )? a. b. c. d.

$1,045.25" $1,042.33 $1,505.49" $1,004.45"

21. Which of the following is an effective way to compute the required return for a stock? a. b. c. d.

CAPM PE Method" Gordon growth model" Discounted cash flow"

22. Analysts expect Jocorp Industries to make payouts of $6.675 billion at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that !Jocorp's payouts will grow at a constant rate in perpetuity. Jocorp stockholders require a return of 11 %. Jocorp has 2.44 billion shares outstanding and its shares are currently trading for $34.20. What growth rate has the market priced into!Jocorp's share price?" a. b. c. d.

3.0% 6.1%" 8.0%" 2.2%"

23. Company !Y's common stock recently paid a dividend of $1. They have traditionally grown their dividend at 2%.!However, after a year of great !performance, they have decided to begin growing their dividend at 3%. The price of the common stock is $14.57. If the required return on the common stock is 9% , what will the new stock price be after the change in the dividend growth!rate?" a. b. c. d.

$16.57" $17.17 $16.69" $17.00"

24. Carlson !Enterprises' common stock dividend is expected to grow at 1% per year. The dividend recently paid was $0.46 per !share, and the required return is 4%. What is the estimated value of the common stock? a. b. c. d.

$15.78" $15.49 $15.25" $14.45"

25. You are contemplating the purchase of a stock you will hold for 2 years. You will receive $0.82!per year in dividends, and then you expect to sell it for $22. If the required return is 8% , what is the most you would pay for the !stock? a. b. c. d.

$20.32 $19.58" $19.90" $21.89"

26. What is the current price of a share of stock if the next dividend is expected to be $3.01 , the growth rate is a constant 5% , and the required return is 14.1% ? a. b. c. d.

$33.31" $33.08" $35.85" $34.58"

27. If a company were to fail, what is the order that stakeholders would get paid beginning with who gets paid first? Select the best choice below. a. b. c. d.

common stock, bond. preferred" preferred, bond, common stock" bond, common stock, preferred" bond, preferred, common stock

28. If dividends for ABC Corp. were $1.44 at the end of 2002 and $3.06 at the end of 2011 , what is the average compounded growth !rate? a. b. c. d.

9.72%" 9.10%" 8.74% 9.90%"

29. An efficient market exists when securities are priced fairly at all times and where a. b. c. d.

new information is rapidly reflected in the price. new information is continually evaluated." new information is largely ignored" new information eventually is reflected in the price."

30. The Peterman Company does not currently pay dividends. !However, investors expect !that, in 6 !years, Peterman will pay its first dividend of $1.50 per share and will continue to grow at 10% per year forever. If investors require a 12% annual return on the !stock, what is the current !price? a. b. c. d.

$44.52" $41.65" $43.89" $42.56

31. Kramerica Industries paid $3.00 per share in dividends yesterday. Its dividends are expected to grow steadily at 4% per year. If the required return is 8.4% , what is the current price (P0 )? a. b. c. d.

$70.10" $69.24" $70.91 $68.52"

32. What is the price of a share of stock if the beta is !1.5, its next dividend is projected to be $2.50 , and its growth rate is expected to be a constant 6% , assuming the market return is 13% and the !risk-free rate is 5% ? a. b. c. d.

$22.73 $19.56" $19.90" $27.80"

33. Compute the price of the stock if the required return is 19.2% , the growth rate is 14%, and current dividend is $3.43. a. b. c. d.

$72.50" $74.10" $70.25" $75.20

34. Analysts expect Oscorp Industries to make payouts of $2.28B at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that!Oscorp's payouts will grow at a constant rate of 2.0% in perpetuity. Oscorp has 2.33B shares outstanding and its shares are currently trading for $16.31. What required return has the market!priced into Oscorp's share!price? a. b. c. d.

9.2%" 6.1%" 8.0% 11.5%"

35. What is the price of a share of preferred stock that has a dividend of $2.56 if the return required on preferred stock is 14.9% ? a. b. c. d.

$16.58" $17.35" $17.10" $17.18

36. You take a short position when you sell a security you do not own by borrowing it from your broker. You make money by: a. b. c. d.

covering your short position by purchasing the stock later, hopefully at a higher price" covering your short position by purchasing the stock later, hopefully at a lower price covering your short position by selling additional share of! another security" covering your short position by buying additional shares of another security"

37. Kramerica Industries paid $2.05 per share in dividends yesterday. Its dividends are expected to grow steadily at 6% per year. If the required return is 6.9%, what is the estimate of the stock's price 1 year from now (P1)? a. b. c. d.

$262.25" $260.25" $255.93 $258.56"

38. Vandalay Industries paid $2.00 per share in dividends yesterday. Its dividends are expected to grow steadily at 7% per year. What are dividends expected to be for each of the next 3 years? Round your answers to the nearest cent." " The year 1 dividend (D1) is $2.14" The year 2 dividend (D2) is $2.29" The year 3 dividend (D3) is $2.45" 39. What would you pay for a share of common stock where the last dividend was $3 and that was expected to grow at −5% per year!indefinitely, assuming a 25% cost of!equity? a. b. c. d.

$9.20" $9.75" $8.75" $9.50

40. Because of declining sales, Wayne Enterprises Inc. announced today that it is suspending dividend payments on its preferred shares. The shares have a 5.8% annual !dividend, have a par value of $55, and are not cumulative. The next dividend would have been paid tomorrow!(if it were not !suspended). Analysts expect !Wayne's profits to rebound strongly in the coming year and also expect Wayne to resume regular annual dividend payments of $3.19 in two years. What is the fair price for the shares today if investors require a return of 7.2%? a. b. c. d.

$58.86" $41.33 $33.06" $62.00"

41. The random walk hypothesis maintains which of the following? a. b. c. d.

that the best estimate of tomorrow’s price is yesterday’s price" that prices follow a random pattern" that the best estimate of tomorrow’s price is today’s price that prices are set randomly"

42. Teal Corp. has been having trouble. The last dividend was $2.84 , and !it's projected to fall 4% per year indefinitely. If the required return is 6% , what is Teal !Corp.'s stock !price? a. b. c. d.

$27.26 $30.32" $31.89" $29.90"

43. You are considering buying shares in Chattanooga Railways. The stock is currently trading for $19.46. Analysts expect the next annual dividend to be $0.90. (The next dividend will be paid in one year.) Dividends are expected to grow in perpetuity at the annual rate of 4.00%. Chattanooga's beta is 0.75. The risk free rate is 4.50% and the expected return on the market is 10.00%. Express your answer in percentage form rounded to one decimal place." Use this information to answer the questions that follow." " a. What annual return will you earn on Chattanooga if you buy it today, hold it, and receive the perpetual stream of growing dividends? 0.0863"

" b. Under the!CAPM, what is the equilibrium rate of return on Chattanooga's shares given its systematic risk? 0.0863

44. Yesterday, Cyberdyne Systems paid out $1.03 billion in dividends and repurchased $2.64 billion worth of shares. Assume that all payouts occur at the end of the year. Next!year's payouts !(due in one !year) are expected to be 4% bigger than last !year's and are expected to grow at that same rate in perpetuity. Cyberdyne Systems has 1.2 billion shares outstanding and its shareholders require a 10 % rate of return. What is the fair price for!Cyberdynes’s shares today? a. b. c. d.

$55.79" $50.25" $53.01 $51.10"

" 45. If preferred stock sold for $90 a share and $2.70 dividends were paid !annually, what would be the required rate of !return? a. b. c. d.

2.95%" 3.10%" 3.00% 2.90%"

46. A share of preferred stock has a par value of $10. It pays a 2% dividend. If the required return is!4% , what is the price of the !stock?" a. b. c. d.

$6" $5 $4" $7"

47. Because of the weak !economy, Nakatomi Trading Corp. has suspended stock repurchases for the current year. Nakatomi makes its payouts annually at the end of each year. Today is the first day of a new year. Nakatomi has announced that it will pay dividends of $1.045 billion !(in aggregate) at the end of the current year. Next year Nakatomi will hold dividends constant and it will resume stock repurchases. It plans to spend $4.045 billion repurchasing shares. In the years !following, analysts expect payouts to grow in perpetuity at 3% per annum. " " Stockholders require a return of 10 % and there are 1.03 billion shares outstanding. What is the fair price for Nakatomi's shares!today? a. b. c. d.

$60.52" $64.10" $63.25" $65.10

48. Select the best choice below. The implication for investors of efficient markets is that if they really are efficient: a. investors should not expend resources picking stocks since all will represent fair values b. investors should watch and read every possible investing source prior to buying stock" c. investors cannot earn positive returns on average" d. truly skilled investors should be able to earn unusually high returns by picking winners more often than other investors" " 49. A share of preferred stock pays a dividend of $0.20 annually. The required rate of return is 4%. What is the preferred !stock's price per !share? a. b. c. d.

$4" $7" $5 $6"

50. This!year, analysts expect Stark Industries to make payouts worth $5.2 billion. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that !Stark's payouts will grow at 3.1% in perpetuity. Stark stockholders require a return of 8.6%. Stark has 2 billion shares outstanding. What is the fair price for Stark's shares today? a. b. c. d.

$94.54" $45.85" $47.27 $98.75"

51. Select the best choice below. The reason that we can ignore the future sales price of the stock when developing the dividend growth model is because a. the present value of a growing annuity is always equal to zero." b. the present value of a very distant cash flow is a small number that won't impact today's price significantly. c. since we won't get that final sales price, we must ignore it when computing current value." d. any cash flows after we sell the security are irrelevant." 52. The !P/E ratio for a firm is 18.7. Expected earnings per share are $1.67. What is the current price of the !firm's stock? a. b. c. d.

$28.37" $31.23 $30.56" $27.60"

53. Analysts expect Virtucon to make payouts of $3.365 billion at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that !Virtucon's payouts will grow at 1.5 % in perpetuity. Virtucon stockholders require a return of 6 %. Virtucon has 2.13 billion shares outstanding and has cash on hand of $6.42billion. What is the fair price for Virtucon's shares today?" a. b. c. d.

$52.58" $38.12 $55.47" $40.52"

54. When you take a long position , your goal is to do which of the following? Select the best choice below." a. b. c. d.

sell first and buy later" repay first and borrow later" borrow first and repay later" buy first and sell later

55. Hayworth Industries does not currently pay dividends. However, investors expect!that in 4!years, Hayworth will pay its first dividend of $1.81 per share and will continue to grow at 11% per year forever. If investors require a 12% annual return on the stock, what is the current price?" a. b. c. d.

$128.83 $181.00" $182.80" $129.50"

56. Because of declining !world-wide sales of its number one !confection, the petit Bearsbum Confection announced today that it is suspending dividend payments on its preferred share...