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Exam 18: Equity Valuation Models

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Question 1

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GAAP allows

A) no leeway to manage earnings.
B) minimal leeway to manage earnings.
C) considerable leeway to manage earnings.
D) earnings management if it is beneficial in increasing stock price.
E) None of the options

F) B) and C)
G) A) and E)

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Question 2

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Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.

A) 3.0%
B) 6.0%
C) 7.2%
D) 4.8%

E) C) and D)
F) B) and D)

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Question 3

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A firm has a return on equity of 20% and a dividend payout ratio of 30%.The firm's anticipated growth rate is

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding.Seaman's required return on equity is 11.6% and WACC is 10.4%.If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares are

High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%, the dividend in the coming year should be

Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Midwest Airline has a beta of 3.00.The return you should require on the stock is

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 12% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Discuss the Gordon, or constant discounted dividend, model of common stock valuation.Include in your discussion the advantages, disadvantages, and assumptions of the model.

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00.After year 3, dividends are expected to grow at the rate of 10% per year.An appropriate required return for the stock is 14%.The stock should be worth _______ today.

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.

Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year.The expected growth rate of dividends is 10% for both stocks.You require a rate of return of 11% on stock A and a return of 20% on stock B.The intrinsic value of stock A

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90.Given this information, it follows that

The most appropriate discount rate to use when applying a FCFF valuation model is the

Stingy Corporation is expected have EBIT of $1.2M this year.Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year.What is Stingy's FCFF

Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Fools Gold Mining Company has a beta of -0.25.The return you should require on the stock is

Historically, P/E ratios have tended to be

You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00.After year 3, per share FCFE is expected to grow at the rate of 10% per year.An appropriate required return for the stock is 14%.The stock should be worth _______ today.

WACC is the most appropriate discount rate to use when applying a ______ valuation model.