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Exam 18: Option Valuation

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Question 51

Multiple Choice

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You wish to earn a return of 10% on each of two stocks,C and D.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock C and 10% for stock D.The intrinsic value of stock C _____.

A) will be greater than the intrinsic value of stock D
B) will be the same as the intrinsic value of stock D
C) will be less than the intrinsic value of stock D
D) A or B
E) none of the above is a correct statement.

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Question 52

Multiple Choice

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The _______ is defined as the present value of all cash proceeds to the investor in the stock.

A) dividend payout ratio
B) intrinsic value
C) market capitalization rate
D) plowback ratio
E) none of the above

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Question 53

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Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. -What is the intrinsic value of Sure's stock today?

If the expected ROE on reinvested earnings is equal to k,the multistage DDM reduces to

Suppose that the average P/E multiple in the oil industry is 16.Shell Oil is expected to have an EPS of $4.50 in the coming year.The intrinsic value of Shell Oil stock should be _____.

J.C.Penney Company is expected to pay a dividend in year 1 of $1.65,a dividend in year 2 of $1.97,and a dividend in year 3 of $2.54.After year 3,dividends are expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.

Because the DDM requires multiple estimates,investors should

_________ is equal to (common shareholders' equity/common shares outstanding) .

High P/E ratios tend to indicate that a company will _______,ceteris paribus.

The ______ is a common term for the market consensus value of the required return on a stock.

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. -What is the market capitalization rate for Risk Metrics?

Suppose that the average P/E multiple in the gas industry is 17.KMP is expected to have an EPS of $5.50 in the coming year.The intrinsic value of KMP stock should be _____.

In the dividend discount model,which of the following are not incorporated into the discount rate?

Highpoint had a FCFE of $246M last year and has 123M shares outstanding.Highpoint's required return on equity is 10% and WACC is 9%.If FCFE is expected to grow at 8.0% forever,the intrinsic value of Highpoint's shares are ____________.

The Gordon model

The growth in dividends of ABC,Inc.is expected to be 15%/year for the next three years,followed by a growth rate of 8%/year for two years; after this five year period,the growth in dividends is expected to be 3%/year,indefinitely.The required rate of return on ABC,Inc.is 13%.Last year's dividends per share were $1.85.What should the stock sell for today?

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 ________.

For most firms,P/E ratios and risk

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25,then it would be reasonable to assume the expected EPS of HPQ in the coming year is ______.

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. -What is Paper Express's market value per share?