FNCE 370 - Lesson 6: Stock Valuation

Lesson 6: Stock Valuation

Question 1

Alpha Enterprises has just paid a dividend of $2 per share. The company then immediately announced that, due to expected cash flow issues from a large project, no dividends will be paid for the next three years. Dividends of $3, $4, and $5 per share will then be paid in each of the three years after that. Following these non-constant dividends, the company expect earnings and dividends to grow at 5% for the foreseeable future. The required return is 12% on the company's stock. What should we pay for one share of Alpha's stock today?

Select one:

a. $44.71

b. $45.51

c. $46.71

d. $81.71

e. $87.00

Question 2

Beta Utilities Inc. expects a constant growth rate of 2% in its dividend payments. If the company expects to pay a dividend of $5 per share in one year's time, and its current share price is $60, what is the required rate of return on Beta's shares?

Select one:

a. 8.33%

b. 10.33%

c. 10.50%

d. 14.00%

e. 28.33%

Question 3

Cobra Banking Group issued preferred shares 10 years ago with a stated value of $95, and a dividend yield of 7%. What is the current price of each preferred share if the required return today is 15%?

Select one:

a. $5.95

b. $44.33

c. $74.38

d. $79.58

e. $85.00

Question 4

Delta Inc. has just paid a dividend of $2.50 per share. Analysts of the company's shares estimate a supernormal growth rate of 30% for the company for the next three years. Afterwards, the company is expected grow at a rate of 20% for another three years, before settling down to a stable growth rate of 8% forever. What is Delta's share price in three years time (after the third year of supernormal growth), assuming a required return of 15%?

Select one:

a. $84.74

b. $87.24

c. $96.28

d. $114.23

e. $128.88

Question 5

A company is electing five directors to its board using cumulative voting, and there are 600,000 shares outstanding. If you were a shareholder who wants to be elected to the board, how many shares must you own to guarantee yourself a directorship seat on the board?

Select one:

a. 100,000

b. 100,001

c. 120,000

d. 120,001

e. 300,001

Question 6

Epsilon Inc.has just paid a dividend of $3 per share, and it is expected to pay a dividend of $3.15 per share in one year's time. Assuming that required return is 13% and the dividend growth will continue at the same rate forever, what is the dividend yield and capital gains yield on Epsilon's shares?

Select one:

a. 5%; 18%

b. 5%; 8%

c. 8%; 5%

d. 8%; 13%

e. There is insufficient information to answer this question.