Question

Valuation of Stock

1) P. Noel Company's common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock?
A) $15.00
B) $22.22
C) $23.33
D) $40.00

2) Green Company's common stock is currently selling at $24.00 per share. The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this rate, what is the stock's expected rate of return?
A) 4.08%
B) 8.00%
C) 12.00%
D) 8.80%

3) Butler, Inc.'s return on equity is 17% and management retains 75% of earnings for investment purposes. Based on this information, what will be the firm's growth rate?
A) 4.25%
B) 22.67%
C) 44.12%
D) 12.75%

4) If a company has a return on equity of 25% and wants a growth rate of 10%, how much of ROE should be retained?
A) 40%
B) 50%
C) 60%
D) 70%

5) You are evaluating the purchase of Cellars, Inc. common stock that just paid a dividend of $1.80. You expect the dividend to grow at a rate of 12% for the next three years. You plan to hold the stock for three years and then sell it. You estimate that a required rate of return of 17.5% will be adequate compensation for this investment. Calculate the present value of the expected dividends.
A) $4.91
B) $5.40
C) $9.80
D) $6.80

6) You are evaluating the purchase of Charbridge, Inc. common stock which currently pays
no dividend and is not expected to do so for many years. Because of rapidly growing sales
and profits, you believe the stock will be worth $51.50 in 3 years. If your required rate of
return is 16%, what is the stock worth today?
A) $59.74
B) $51.25
C) $32.99
D) $0.00 because stocks that do not pay dividends have no value.

7) A stock currently sells for $63 per share, and the required return on the stock is 10%.
Assuming a growth rate of 5%, calculate the stock's last dividend paid.
A) $1
B) $3
C) $5
D) $7

Answer 1

1

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price = 2 * (1+0.05) / (0.14 - 0.05)

Price = 23.33

2

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

24 = 1.92 * (1+0.04) / (Cost of equity - 0.04)

Cost of equity% = 12.00