ABC, Inc., just paid a dividend of $1.24, and the company expect to grow its dividend at a constant rate of 5%. What is ABC's required rate of return if
... [Show More] its today's value based on the dividend discount model is $30.16, ? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Intrinsic value = V0=D0 × (1 + g):k − g
$30.16=$1.24 × 1.05/ k - .05
Rate of return: k = 0.093170 or 9.32%
Investors require a 10% return from Sommers, Inc. The company's return on equity is 15%, and expects to have an earnings per share of $8 next year. The company ususally plowback 50% of its earnings for future growth.
What is the current value of Sommers' stock? (Do not round intermediate calculations.)
Given EPS = $8, ROE = 15%, plowback ratio = 0.50, and k = 10%, we first calculate the price with the constant dividend growth model
P0=D1/k − g = EPS × (1 − b) /k − ROE × b
=$8 × (1 − 0.50)/0.10 − 0.15 × 0.50
= $4.00/0.10 − 0.075 = $160
You will expect a firm's ____________ when it increases its dividend payout ratio.
a. plowback ratio will fall
b. earnings growth rate will fall
c. return on assets will increase
d. earnings retention ratio will increase
a. plowback ratio will fall
Yeshin, Corp. has an expected return on equity of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.
5%
15%
17.5%
45%
17.5%
Explanation
g = 0.25(1 − 0.3) = 0.175
ABC, Inc. is expected to pay an annual dividend per share of $3.00, and investors require a rate of return on S&P500 index is 15%, with the T-bill rate at 5%. What should be the current share price of ABC's stock if ABC's beta is 1.2, with a growth rate of 5%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
$25
k = rf + β[E(rM) − rf) = 0.05 + 1.2 × (0.15 − 0.05) = 0.170 or 17.0%
P0 =D1/k - g
=$3.00/0.170 - 0.05=$25.00
Tango, Corp. expects to have an earnings per share of $4. The company will be paying out 50% of that earnings to its shareholders, with the rest retained in the company for future growth at rate of 16% each year. The share price of the company's stock is currently at $25.What rate of return do Tango's investors require if its stock's intrinsic value has been reflected in the market price? (Do not round intermediate calculations.)
16%
D1 = E1 × (1 − b) = $4 × 0.5 = $2.0
g = b × ROE = 0.5 × 0.16 = 0.080 or 8.0%
k=D1/P0+g=$2.0/25 +0.080
=0.16
=16.0%
Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.
15.6%
10.8%
8%
16.8%
15.6%
k = 0.06 + 1.20(0.14 − 0.06) = 0.156
A preferred stock will be worth ______________ today if it is expected to pay a fixed amount of $6 dividend per share every year, and investors require a return of 7% on this preferred stock.
$85.71
Explanation
V0 = 6.00 / 0.07 = 85.71
ABC, Corp. had an earnings of $7.5 million a year ago, with 1 million shares outstanding. How much dividend ABC, Corp. paid out last year if it plowed back 40% of its earnings?
$4.50
$3.75
$3.00
$7.50
$4.50
Explanation
EPS = $7.5 million /1 million = $7.50
Dividend = $7.50 (1−0.40) = $7.50 (0.60) = $4.50
Umber, Inc. just paid a dividend of $2.00 per share. And next year's dividend will be $2.05. What is Umber's plowback ratio if it has a ROE of 12.00%? (Round your answer to 2 decimal places.)
Plowback ratio = 20.83%
We can use the relationship g = ROE × b to find the plowback ratio (b).
The growth rate implied by the recent dividend and the expected dividend is estimated using the equation D1 = D0 × (1 + g):
$2.05 = $2.00 × (1 + g)
1 + g = $2.05/$2.00 = 1.025
g = 2.50%
Then
2.50% = 12.00% × b
b = 2.50%/12.00% = 20.83%
Weis, Corp. is expected to generate an earnings per share of $6 next year, with a return on equity of 18%. And investors require a return of 14%. What should be Weis's common stock's intrinsic value if the company plows back 70% of its earnings each year?
$128.57
$69.77
$20.93
$150
$128.57
V0=6.00(1−0.70)/0.14−0.18(0.70)=128.57
Firms with lower expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with higher expected growth rates.
lower than
higher than
There is not necessarily any linkage between risk and P/E ratios.
equal to
lower than
Bravissimi, Inc. is going to pay a dividend of $4, and the dividends are expected to grow at a constant rate of 6% every year. The beta of Bravissimi's stock will be constant at 0.66. The T-bill rate is currently estimated to be 5%, and the return of S&P500 index is expected to be 10%.
a. What rate of return Bravissimi's investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Calculate the current value of Bravissimi's stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
a. 8.30%
Explanation
Required rate of return (Market capitalization rate) = k = rf + β[E(rM) − rf]
= 0.05 + 0.66(0.10 − 0.05) = 0.0830 = 8.30%
b. $173.91
Explanation
Intrinsic value = V0=D1/k − g
=$4/0.0830 − 0.06 = $173.91
What the price should be for a preferred stock which pays out $4.80 dividend per share and you require a return of 5% for this preferred stock?
$112.50
$45
$96.00
$96.00
Explanation
$4.80/0.05 = $96
A firm that has an ROE of 12% is considering increasing its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?
I. All else equal, the firm's growth rate will accelerate after the payout change.
II. All else equal, the firm's stock price will go up after the payout change.
III. All else equal, the firm's P/E ratio will increase after the payout change.
IV. None of the above.
IV. None of the above.
Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________.
$24.29
$31.13
$27.39
$27.39
k = 0.06 + 1.2(0.12 − 0.06) = 0.132
V0=2.00+29.00/1+0.1320= $27.39
a. The common stock of Russel, Corp. is currently selling at $50 and investors require a rate of return of 18%. Russel is expected to pay a dividend of $2. At what rate the market would expect Russel's dividends to growth? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What will be the price of Russel's common shares if analysts revised its dividend growth rate down to 2%?(Round your answer to 2 decimal places.)
c. After that dividend growth revision, Russel's P/E ratio would be
The P/E ratio will decrease.
The P/E ratio will increase.
a. 14%
b. $12.50
c. The P/E ratio will decrease.
Explanation
a.
Using the constant-growth DDM, P0=D1/k − g
$50 = $2/0.18 − g --> g=0.14 or 14%
b. P0=D1/k − g = $2/0.18 − 0.02=$12.50
c.
The price falls in response to the more pessimistic forecast of dividend growth. The forecast for current earnings, however, is unchanged. Therefore, the P/E ratio decreases. The lower P/E ratio is evidence of the diminished optimism concerning the firm's growth prospects. [Show Less]