Name: Chapter 13: Equity Valuation 1. Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6% Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by A. -10% B. -20% C.-25% D. -33% 2. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plough back ratio is 60%,its PE ratio will be A. 7.14 B. 14.29 C. 16.67 D.22.22 3. Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is A. $16.67 B. S25 C. $37.50 D. $40.83 4. Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plough back ratio. By how much does the firm's ROE exceed the market capitalization rate? A5% B. 1% C. 1.5% D. 29 5. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be if it follows a policy of paying 30% of earnings in the form of dividends. A. 5% B. 15% C. 17.5% D. 45% 6. Rose Hill Trading Company is expected to have EPS in the upcoming year of S8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plough back ratio of 70%, its dividend in the upcoming year should be A. S1.12 B. $1.44 C. $2.40 D. $5.60 7. Flanders, Inc. has expected earnings of S4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A. -56.33 B. SO C. $20.34 D. $26.67 8. Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio? A. FirmA B. Firm B C. Both would have the same PE if they were in the same industry. D. There is not necessarily any linkage between risk and PE ratios. 9. Westsyde Tool Company is expected to pay a dividend of S2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a onc-period valuation model, the intrinsic value of Westsyde Tool Company stock today is A S24.29 B. $27.39 C. $31.13 D. $34.52 10. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of S. Using the constant-growth DDM, the intrinsic value of the stock is A. $50 B. $100 C. $150 D. $200 11. A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO? A. $23.57 B. SIS C. $19.78 D. S21.34 12. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plough back ratio of 20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. What price do you expect ART shares to sell for in 4 years? A. S53.96 B. $44.95 C. $41.68
