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# FIN350 Quiz No. 4 First Name_Last Name _

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### FIN350 Quiz No. 4 First Name_Last Name _

1. 1. FIN350 Quiz No. 4 First Name_______ Last Name ___________ WACC = wdrd(1-T) + wprp + wcrs rp = D / P rs = D1 / P0 + g rs = rRF + (rM – rRF) β Rd (before tax): YTM Firm value=FCF1/(WACC-g) if free cash flows grow at a constant rate What would be the current price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock’s required return is 13% and next year dividend payment is \$5 per share?  \$5(1.25) 2 (1.05)    Po = \$5 1 \$5(1.25) 2  .13 − .05  =\$85.80 + \$5(1.25) + +   2 3 (1.13) (1.13) (1.13) (1.13) 3 1. According to the dividend discount model, the current value of a stock is equal to the: A) present value of all future dividends, discounted at the dividend growth rate. B) sum of all future expected dividends. C) next expected dividend only, discounted to the present. D) present value of all expected future dividends. E) A and C are correct. 2. The PDQ Company’s common stock is expected to pay a \$3.00 dividend in the coming year. If investors require a 10% return and the growth rate in dividends is expected to be 5% (positive 5%), what will the market price of the stock be? a. \$20.00 b. \$40.00 c. \$30.00 d. \$60.00 3. If a firm will produce the following constant-growth free cashflows (to the firm): FCF1=\$10m at end of year 1, FCF2=\$10.5m at the end of year 2, and so on with the growth rate g= 5%. If the weighted average cost of capital for the whole firm is 10% and the market value of debt is \$20 million and there are 6 million shares of common stock outstanding, how much is the per share stock value? 1
2. 2. a. \$20.00 b. \$30.00 c. \$170.00 d. \$60.00 e. \$80.00 4. The stock of Hawaii Sea World has a constant dividend growth rate of 6% and just paid a dividend of \$1 (=D0). If the required rate of return is 12%, what is the current stock price? A) \$ 72.00 B) \$ 39.92 C) \$ 15.40 D) \$ 99.80 E) \$ 17.67 5. The price of a stock will likely decrease if: A) the investment horizon increases. B) the growth rate of dividends decreases. C) the discount rate decreases. D) there is good news to the firm. 6.If a stock’s P/E ratio is 16 at a time when earnings are \$2 per year, what is the stock’s current price? A) \$32.00 B) \$18.00 C) \$42.00 D) \$8.00 7. How much should you pay for a share of stock now that offers a constant dividend growth rate of 10%, has a discount rate of 16%, and pays a dividend of \$6 per share next year ? A) \$84.00 B) \$45.00 C) \$85.00 D) \$100.00 2
3. 3. 8. The rate at which the stock price is expected to appreciate (or depreciate) is the: A) Current yield. B) Capital gains yield. C) Dividend yield. D) Total yield. E) Earnings yield. 9. Given the stock trading information shown in the graph below, what is the ratio of stock price over recent 12months’ earnings per share (that is: price over twelve trailing month EPS )? A) 2.16% B) 17.25 C) 2.655 D) 1.4608 E) 46.72 Where can you find a stock quote, and what does one look like?  Stock quotes can be found in a variety of print sources (Wall Street Journal or the local newspaper) and online sources (Yahoo!Finance, CNNMoney, or MSN MoneyCentral). by Donglin Li 9-31 10.Suppose that the stock market is efficient in the weak form so that technical analysis in useless. When you see that one stock’s price has gone up (such as the 2.16% upward wiggling shown in the above graph), you should: A) feel lucky for not having invested in this stock. B) sell the stock on the next day as the price will drop in the following week C) buy the stock on the next day as the price will rise in the following two years D) be indifferent between buying or selling the stock on the next day. 3
4. 4. 11.What would be the current price of a stock when dividends are expected to grow at a 10% rate for three years, then grow forever at a constant rate of 5%, if the stock’s required return is 10% and next year dividend payment is \$5.5 per share? A) \$120.00 B) \$5.08 C) \$1.00 D) \$15.80 E) - \$ 99.38 12. You have discovered from looking at charts of past stock prices that if you buy just after a stock price has declined for five consecutive days, you make money every time! This is clearly a violation of _________ market efficiency. You also find that, based on insider information you obtain from your CFO friend of JetGreen, you make money by trading JetGreen stocks. This is clearly a violation of _________ market efficiency. A) strong form; semi-strong form B) weak form; strong form C) semi-strong form; strong form D) semi-weak form; weak form 13. A company has preferred stock outstanding which pays a dividend of \$10 per share a year. The current price of the preferred stock is \$75 per share. The yield to maturity on firms’ long term bond is 4.5%. What is the cost of preferred stock? A) 6% B) 7.5% C) 13.33% D) 10.98% E) 8% 4
5. 5. 14. A company has preferred stock outstanding which pays a dividend of \$10 per share a year. The current price of the preferred stock is \$75 per share. The yield to maturity on firms’ long term bond is 5.7%. What is the (pre-tax) cost of debt? A) 6% B) 5.7% C) 10.67% D) 5.4% E) 8% 15. For a multi-product firm, if a new project's beta (risk) is different from that of the overall firm, then the A) project should be discounted at a rate commensurate with its risk level (which could be based on the project’s beta) B) project should be discounted using the overall firm's PB ratio. C) project should be discounted at the Treasury-bill rate. D) project should be discounted at 10.5%. 16. The market value of equity is \$500 million. The market value of debt is \$500 million. The total market value of the firm is \$1000 million. The cost of equity is 14%, the pretax cost of debt is 10%, and the tax rate is 40%. What is the firm’s WACC? A) 9.09% B) 22.11% C) 10.00% D) 14.17% E) 13.78% 17. If a firm uses the same company cost of capital for evaluating all projects with very different risks, which of the following is likely? A. Rejecting good low risk projects B. Accepting poor high risk projects C. Accepting all potential projects of any risk levels D. Both A and B E. Only accepting government projects 18. Using the company cost of capital to evaluate a new project is: A. Correct for projects that are about as risky as the firm's other operations (existing assets) B. Always incorrect C. Always correct D. Always not as good as using risk free rate to evaluate a project 5