Chapter 9 Practice Question
Question 1
A firm attempting to purchase a majority of another firm’s outstanding stock is called ________.
a. Proxy
b. Proxy fight
c. Takeover
d. Poison pill
Question 2
If expected dividend is $1.25, with a growth of 4.7%, and is currently selling at $22.00, then what is the
stock’s expected dividend yield for the coming year?
e. 5.4%
f. 6.25%
g. 5.68%
h. 6.08%
Question 3
ABC Company’s current stock price is $36.00, its last dividend was $2.40, and its required rate of return
is 12%. If dividends are expected to grow at a constant rate, g, in the future, and if rs is expected to
remain at 12%, what is Fletcher’s expected stock price 5 years from now?
a. $ 45.95
b. $ 44.95
c. $ 42.95
d. $ 40.95
Question 4
Stock of Zee Company is expected to pay a dividend of $ 0.50 at the end of the year (i.e., D1 = $ 0.50),
and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the
stock’s expected price 4 years from today?
a. $ 12.11
b. $ 13.11
c. $ 14.11
d. $ 14.51
Question 5
Cartwright Brothers' stock is currently selling for $40 a share. The stock is expected to pay a $2 dividend
at the end of the year. The stock's dividend is expected to grow at a constant rate of 7 percent a year
forever. The risk-free rate (kRF) is 6 percent and the market risk premium (k M - kRF) is also 6 percent. What
is the stock's beta?
a. 1.20
b. 1.00
c. 2.00
d. 0.83
Question 6
Macrohard Company expects to pay a dividend of $6 per share at the end of year one, $8 per share at
the end of year two and then be sold for $136 per share at the end of year 2. If the required rate on the
stock is 20%, what is the current value of the stock?
a. $100
b. $105
c. $110
d. $120
Question 7
Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and
non-participating preferred stock outstanding. The required return on preferred stock (k p) is 8 percent.
The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par.
What is the market value of the preferred stock?
a. 125
b. 175
c. 200
d. 150
Question 8
If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable
conclusion?
a. The stock should be avoided or, if already held, sold.
b. The stock is overpriced in the market.
c. The stock should be bought.
d. All the above options are incorrect.
Question 9
The stock of the Health Corporation is currently selling for $20 a share and is expected to pay a $1
dividend at the end of the year. If you bought the stock now and sold it for $23 after receiving the
dividend, what rate of return would you earn?
a. 5%
b. 10%
c. 15%
d. 20%
Question 10
Wayne’s Steaks, Inc., has a 9 percent, non-callable, $100-par-value preferred stock issue outstanding. On
January 1 the market price per share is $73. Dividends are paid annually on December 31. If you require
a 12 percent annual return on this investment, what is this stock’s intrinsic value to you (on a per share
basis) on January 1?
a. $75
b. $80
c. $82
d. $84
Question 11
Hi-tech Lubricants last paid dividend of Rs 2, which is expected to grow by 10% in the first year and 5% in
the second year. Thereafter, the dividend is expected to grow at a constant rate of 2%. If investors
require a return of 10% to purchase the stock, what is the stock’s market value?
a. Rs 21
b. Rs 28
c. Rs 22
d. Rs 30
Question 12
Salt Lake City Services, Inc. provides maintenance services for commercial buildings. Currently, the beta
on its common stock is 1.08. The risk-free rate is now 10 percent, and the expected return on the
market portfolio is 15 percent. It is January 1, and the company is expected to pay a $2 per share
dividend at the end of the year, and the dividend is expected to grow at a compound annual rate of 11%
for many years to come. Based on the CAPM and other assumptions you might make, what dollar value
would you place on one share of this common stock?
a. $45.45
b. $42.42
c. $40.45
d. $39.25
Question 13
For the next five years, the annual dividends on the shares of Pak Company Limited are expected to be
Rs. 2.00, Rs. 2.10, Rs.2.20, Rs. 3.50, and Rs. 3.75. In addition, the share price is expected to be Rs. 40.00
in five years. If the required return on equity is 10%, the value of this share at present should be about:
a. Rs. 29.76
b. Rs. 31.76
c. Rs. 34.76
d. Rs. 36.76
Question 14
General Motors (GM) sells for $66.00 per share. The expected dividend for next year is $2.40. Use the
single-period DDM to predict GMs stock price one year from today. The risk-free rate of return is 5.3%,
the equity risk premium is 6.0 percent, and GM’s beta is 0.90.
a. $70.66
b. $67.25
c. $66.20
d. $73.10
Question 15
The risk-free rate is 6%, the required return on the market is 10%, and Upton company’s stock has a
beta coefficient of 2.5. If the dividend expected during the comping year is $2.25 and if g = a constant
5%, at what price should Upton’s stock sell if market is in equilibrium?
A. 32.14
B. 31.14
C. 20.45
D. None
Question 16
A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is
12.5%, and the expected constant growth rate is 8.5%. What is the current stock price?
A. $17.82
B. $18.28
C. $18.75
D. None
Question 17
A firm's last dividend was $1.50. The dividend growth rate is expected to be constant at 15% for 3 years,
after which dividends are expected to grow at a rate of 6% forever. If the required return is 11%, what is
the company's current stock price?
A. None
B. $37.82
C. $38.99
D. $40.20
