1

A stock just paid a dividend of $4 and this is expected to grow at an annual rate of 3% pa. You estimate that the stock's required return is 11% pa. Both the discount rate and growth rate are given as effective annual rates, and dividends are paid annually.

Which of the following statements is NOT correct? All answers are rounded to two decimal places.

a.

The share price at time t=0 is $51.50

b.

Total return of the stock is equal to the company's long term cost of equity.

c.

Dividend growth rate is equal to the long term expected capital yield.

d.

The dividend at time t=3 will be $4.37

e.

The capital return of the stock is 11%

2

You have the following information relating to a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now.

Use this information to value the companys equity.

Data on a Levered Firm with Perpetual Cash Flows

Item abbreviation	Value	Item full name
FFCF (millions)	$7.6	Firm free cash flow (or Cash Flow from Assets)
g	3% pa	Growth rate of FFCF
rD	4% pa	Cost of debt
rEL	6.5% pa	Cost of levered equity
D/VL	35% pa	Debt to assets ratio, where the asset value includes tax shields
tC	30%	Corporate tax rate

The current value of levered equity is

a.

$120.63

b.

$188.19

c.

$344.67

d.

$289.52

e.

$447.63

Clear my choice

3

Investment guru Warren Buffett, famously said The investor of today does not profit from yesterdays growth. This is most closely related to which financial concept?

a.

Weak-form market efficiency

b.

The time value of money principle

c.

Investing in projects with a positive net present value

d.

Diversification

e.

Systematic risk