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Exam 9: Valuing Stocks

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Question 1

Multiple Choice

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Use the following information to answer the question(s) below. -You expect Whirlpool Corporation (WHR) to have earnings per share of $6.10 over the coming year.If the average P/E ratio for the appliance industry sector is 17.0,the value of a share of Whirlpool stock based upon the comparables approach is closest to:

A) $103.70
B) $27.90
C) $35.90
D) $23.10

Correct Answer

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A

Question 2

Multiple Choice

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Which of the following statements is FALSE?

A) As firms mature,their earnings exceed their investment needs and they begin to pay dividends.
B) Total return equals earnings multiplied by the dividend payout rate.
C) Cutting the firm's dividend to increase investment will raise the stock price if,and only if,the new investments have a positive NPV.
D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

Correct Answer

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B

Question 3

Essay

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Use the information for the question(s)below. You expect DM Corporation to generate the following free cash flows over the next five years: Beginning with year six,you estimate that DM's free cash flows will grow at 6% per year and that DM's weighted average cost of capital is 15%. -Calculate the enterprise value for DM Corporation.

Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.IF Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Which of the following formulas is INCORRECT?

Use the information for the question(s) below. Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%. -A firm's net investment is:

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. -You expect Whirlpool Corporation (WHR) to have earnings per share of $6.10 over the coming year.If Whirlpool stock is currently trading at $87.00 per share,then Whirlpool's P/E ratio is closest to:

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Use the information for the question(s) below. Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%. -Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.If Defenestration's payout rate remains constant,then Defenestration's stock price is closest to:

Which of the following statements is FALSE?

JRN Enterprises just announced that it plans to cut its dividend from $2.50 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 at 4% per year and JRN's stock was trading at $25.00 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:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:

Use the information for the question(s) below. Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%. -Suppose you plan to hold Von Bora stock for only one year.Your dividend yield from holding Von Bora stock for the first year is closest to:

Growing Real Fast Company (GRF)is expected to have a 25 percent growth rate for the next four years (effecting D₁,D₂,D₃,and D₄).Beginning in year five,the growth rate is expected to drop to 7 percent per year and last indefinitely.If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent,then what is the value of a share of GRE?

Given Nielson's current share price,if Nielson's equity cost of capital is 13%,then Nielson's expected growth rate is closest to:

Use the information for the question(s) below. Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year.You expect Von Bora's stock price to be $25.00 at the end of two years.Von Bora's equity cost of capital is 10%. -Suppose you plan to hold Von Bora stock for only one year.Your capital gain from holding Von Bora stock for the first year is closest to:

Use the following information to answer the question(s) below. -Assuming that Novartis AG (NVS) has an EPS of $3.35,based upon the average P/E ratio for its competitors,Novartis' stock price is closest to: