Question 1

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

a. 7.17%

b. 17.91%

c. 8.60%

d. 14.33%

Question 2

Valorous Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

a. $32.38

b. $36.19

c. $39.99

d. $38.09

Question 3

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future?

a. $22.32

b. $29.76

c. $14.88

d. $37.20

Question 4

Which of the following statements is FALSE of the dividend-discount model?

a. As firms mature, their growth slows to rates more typical of established companies.

b. The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever.

c. The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders.

d. We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth.

Question 5

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $2.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 14% and their equity cost of capital is 11%. The value of a share of KTI's stock today is closest to ________.

a. $37.50

b. $75.00

c. $25.00

d. $62.50

Question 6

JRN Enterprises just announced that it plans to cut its dividend from $3.00 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to ________.

a. $38.63

b. $12.75

c. $25.50

d. $19.32

Question 7

Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport?

a. $21.18

b. $12.71

c. $16.94

d. $14.83

Question 8

Chittenden Enterprises has 643 million shares outstanding. It expects earnings at the end of the year to be $960 million. The firm's equity cost of capital is 9%. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittenden's earnings are expected to grow at a constant 3% per year, what is Chittenden's share price?

a. $3.74

b. $14.94

c. $2.24

d. $7.47

Question 9

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

a. 14.5%

b. 5.5%

c. 5.0%

d. 11.0%

Question 10

Assume Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgates earnings are expected to grow at the current industry average of 5.2% per year. If Colgates equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Colgate stock should sell?

a. 51.57

b. 56.71

c. 39.44

d. 34.30