Q&A Hero

Q: Assume that a firm currently has EBIT of $2,000,000, a degree of total leverage of 7.500, and a degree of financial leverage of 1.875. If sales decline by 20% next year, then what will be the firm's expected EBIT in one year? Do not round intermediate calculations. a. $464,000 b. $400,000 c. $488,000 d. $372,000 e. $324,000

Q: Which of the following statements is CORRECT? a. The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales. b. The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL). c. Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage. d. For a given change in sales, the corresponding percentage change in net income could be more or less than the percentage change in operating income. e. The degree of total leverage (DTL) is equal to the DFL divided by the degree of operating leverage (DOL).

Q: Alvarez Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 45.50% of sales, so the company's current operating income is $1,135,000. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? a. 2.8580 b. 2.6520 c. 2.2401 d. 2.5748 e. 2.6263

Q: The Quick Company expects its sales to increase by 50% in the coming year. The firm's current EPS is $1.75. Its degree of operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the DTL approach? Do not round intermediate calculations. a. $4.69 b. $4.50 c. $3.99 d. $4.36 e. $5.53

Q: Which of the following statements is CORRECT? a. An increase in fixed costs, (holding sales and variable costs constant) will reduce the company's degree of operating leverage. b. An increase in interest expense will reduce the company's degree of financial leverage. c. If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage. d. If a firm's degree of operating leverage increases, its degree of financial leverage must also have increased. e. If the company has no debt outstanding, then its degree of total leverage equals its degree of financial leverage.

Q: Your firm's EPS last year was $1.00. You expect sales to increase by 32.50% during the coming year. If your firm has a degree of operating leverage equal to 1.25 and a degree of financial leverage equal to 3.50, then what is its expected EPS? Do not round intermediate calculations. a. $2.35 b. $2.42 c. $2.25 d. $2.64 e. $1.99

Q: 1429I = $571,429 I = $500,000 Calculate dollar amount of debt from interest expense: Debt = Interest expense / Coupon rate Debt = $500,000 / 9.5% Debt = $5,263,157.89 u200b Calculate debt that needs to be retired: $15,000,000.00 $5,263,157.89 = $9,736,842.11 u200b u200b u200b u200b u200b LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure

Q: 1429 = $4,000,000 $4,000,000 I

Q: 00 = 1.750 DFL DFL = 1.1429 u200b Calculate interest from DFL equation: DFL = EBIT EBIT I u200b

Q: A company currently sells 75,000 units annually. At this sales level, its EBIT is $4 million, and its degree of total leverage is 2.0. The firm's debt consists of $15 million in bonds with a 9.5% coupon. The company is considering a new production method which will entail an increase in fixed costs but a decrease in variable costs, and will result in a degree of operating leverage of 1.750. The president, who is concerned about the stand-alone risk of the firm, wants to keep the degree of total leverage at 2.0. If EBIT remains at $4 million, what dollar amount of bonds must be retired to accomplish this? Do not round intermediate calculations. a. $10,418,421.05 b. $10,905,263.16 c. $9,736,842.11 d. $11,684,210.53 e. $7,497,368.42

Q: Company D has a 50% debt ratio, whereas Company E has no debt financing. The two companies have the same level of sales and the same degree of operating leverage. Which of the following statements is most CORRECT? a. If sales increase 10% for both companies, then Company D will have a larger percentage increase in its net income. b. If sales increase 10% for both companies, then Company D will have a larger percentage increase in its operating income (EBIT). c. If EBIT increases 10% for both companies, then Company D's net income will rise by more than 10%, while Company E's net income will rise by less than 10%. d. Company E has a higher degree of financial leverage. e. The two companies have the same degree of total leverage.

Q: 6667 = DOL 1

Q: The "degree of leverage" concept is designed to show how changes in sales will affect EBIT and EPS. If a 30.00% increase in sales causes EPS to increase from $1.00 to $1.50, and if the firm uses no debt, then what is its degree of operating leverage? Do not round intermediate calculations. a. 1.2500 b. 1.5667 c. 2.0333 d. 1.6667 e. 1.3000

Q: 21 = S VC $2,400,000

Q: 45 = DOL 1.20 DOL = 1.21

Q: Lincoln Lodging Inc. estimates that if its sales increase 10.00% then its net income will increase 14.50%. The company's EBIT equals $2.4 million, and its interest expense is $400,000. The company's operating costs include fixed and variable costs. What is the level of the company's fixed operating costs? Do not round your intermediate calculations. a. $480,000 b. $455,000 c. $400,000 d. $500,000 e. $420,000

Q: Stromburg Corporation makes surveillance equipment for intelligence organizations. Its sales are $75,000,000. Fixed costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and also permit sales to increase to $98,000,000. What is Stromburg's degree of operating leverage at the new projected sales level? a. 3.8141 b. 4.4100 c. 3.9730 d. 3.0989 e. 4.0127

Q: If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level, which of the following statements is CORRECT? a. The percentage change in operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income. b. The percentage change in EBIT will equal the percentage change in net income. c. The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt. d. The percentage change in operating income will be less than the percentage change in net income. e. Since debt is used, the degree of operating leverage must be greater than 1.

Q: Which of the following is a key benefit of using the degree of leverage concept in financial analysis? a. It allows decision makers a relatively clear assessment of the consequences of alternative actions. b. It establishes the optimal capital structure for the firm. c. It shows how a given change in leverage will affect sales. d. It identifies, with certainty, the future net income based upon sales projections about the future. e. None of the above statements is correct.

Q: Assume that a firm has a degree of financial leverage of 1.25. If sales increase by 20%, the firm will experience a 60% increase in EPS, and it will have an EBIT of $100,000. What will be the EBIT for this firm if sales do not increase? Do not round intermediate calculations. a. $64,189 b. $77,703 c. $67,568 d. $54,054 e. $68,243

Q: The use of financial leverage by the firm has a potential impact on which of the following? (1) The risk associated with the firm. (2) The return experienced by the shareholder. (3) The variability of net income. (4) The degree of operating leverage. (5) The degree of financial leverage. a. 1, 3, 5 b. 1, 2, 5 c. 2, 3, 5 d. 2, 3, 4, 5 e. 1, 2, 3, 5

Q: 7143 I = $2,857,143 I = $1,666,667 Calculate dollar amount of debt from interest expense: Debt = Interest expense / YTM Debt = $1,666,667 / 10.40% Debt = $16,025,641 u200b LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure

Q: 4 = 1.4 DFL DFL = 1.7143 u200b Calculate interest from DFL equation: DFL = EBIT EBIT I u200b

Q: A company has an EBIT of $4 million, and its degree of total leverage is 2.4. The firm's debt consists of $20 million in bonds with a YTM of 10.40%. The company is considering a new production process that will require an increase in fixed costs but a decrease in variable costs. If adopted, the new process will result in a degree of operating leverage of 1.4. The president wants to keep the degree of total leverage at 2.4. If EBIT remains at $4 million, what dollar amount of bonds must be outstanding to accomplish this (assuming the yield to maturity remains at 10.40% and is equal to the coupon rate)? Do not round intermediate calculations. a. $16,025,641 b. $12,500,000 c. $18,429,487 d. $12,019,231 e. $19,391,026

Q: Monroe Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 35.00% of sales, and its fixed costs amount to 50.00% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. What is Monroe's degree of operating leverage in sales dollars? a. 4.3767 b. 3.4667 c. 5.4167 d. 4.7667 e. 4.3333

Q: Bell Brothers has $3,000,000 in sales. Fixed costs are estimated to be $100,000 and variable costs are equal to 50.00% of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 9.00%. If Bell Brothers' sales were to increase by 20.00%, how much of a percentage increase would you expect in the company's net income? Do not round intermediate calculations. a. 18.09% b. 22.90% c. 20.15% d. 28.40% e. 24.73%

Q: 62 = (X $60,000) / $60,000 $97,200 = X $60,000

Q: 50 = (X $60,000) / $60,000

Q: Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firms total corporate value, in millions? Do not round intermediate calculations. Year 1 2 3 Free cash flow -$20.00 $48.00 $50.00 u200b a. $492.77 b. $349.05 c. $394.22 d. $418.86 e. $410.65

Q: Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $13.00 per share. Sally asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis. Estimated rs = 10.00% (must be changed to force Calculated Price to equal the Actual Market Price) Actual Market Price, P0: $13.00 u200b Rapid growth Normal growth Year 0 1 2 3 4 5 Dividend growth rate (insert correct values) u200b 10% 10% 10% 5% 5% Calculated dividends (D0 has been paid) u200b $1.00 ? ? ? ? ? HV3 = D4/(rs - g4). Find using Estimated rs. u200b u200b u200b ? u200b u200b Total CFs u200b ? ? ? PVs of CFs when discounted at Estimated rsu200b ? ? ? Calculated Price = P0 = Sum of PVs = u200b u200b $0.00 u200b u200b A positive number will be here when dividends are estimated. The Calculated Price will equal the Actual Market Price once the correct rs has been found. Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process is quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs? a. 15.47% b. 10.64% c. 16.46% d. 12.20% e. 14.19%

Q: 00% 30.00% 30.00% 30.00% 6.91% Dividend $1.0000 $1.3000 $1.6900 $2.1970 $2.8561 $3.0534 Horizon value = D5/(rs - g5): 59.97 Total CFs $1.30 $1.69 $2.20 $62.83 PV of CFs $1.16 $1.35 $1.56 $39.93 Stock price = $44.00. Must equal $44. Change the forecasted growth rate till reach $44. We must solve for the long-run growth rate. We can forecast the dividends in Years 1-4, so they are inserted in the time line. We need a growth rate to find D5 and the HV. We begin with a guess of say 5.0%, which we insert in the forecast cell. We then find the PV of the forecasted CFs and sum them. If the sum equals the given price, then our growth rate would be correct. If not, we need to substitute in different g's until we find the one that works. We used Excel's Goal Seek function to simplify the process, but one could use trial and error. u200b LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure

Q: Savickas Petroleums stock has a required return of 12.00%, and the stock sells for $44.00 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30.00% per year for the next 4 years, so D4 = $1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stocks expected constant growth rate after t = 4, i.e., what is X? Do not round your intermediate calculations. a. 6.91% b. 8.01% c. 7.05% d. 5.60% e. 5.73%

Q: 00% 30.00% 8.00% Dividend $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562

Q: Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations. Year 0 1 2 3 4 5 6 Growth rate NA NA NA NA 60.00% 30.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562 u200b a. $11.87 b. $11.28 c. $13.65 d. $13.30 e. $12.23

Q: Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15.0% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price? Do not round intermediate calculations. a. $31.49 b. $39.53 c. $26.80 d. $33.50 e. $34.17

Q: Ackert Company's last dividend was $3.00. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? Do not round intermediate calculations. a. $88.92 b. $71.71 c. $78.88 d. $80.31 e. $68.84

Q: The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 22% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price? Do not round intermediate calculations. a. $33.35 b. $44.73 c. $40.67 d. $39.04 e. $44.33

Q: Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 41% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The companys last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? Do not round intermediate calculations. a. $45.43 b. $54.06 c. $48.16 d. $42.70 e. $37.71

Q: Nachman Industries just paid a dividend of D0 = $2.50. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stocks current market value? Do not round intermediate calculations. a. $102.82 b. $73.08 c. $84.98 d. $65.43 e. $93.47

Q: Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $57.50 per share. What is its effective annual (not nominal) rate of return? a. 6.78% b. 8.07% c. 7.28% d. 8.14% e. 7.14%

Q: Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $70.00, what is its nominal (not effective) annual rate of return? a. 4.29% b. 6.57% c. 6.74% d. 4.86% e. 5.71%

Q: Based on the corporate valuation model, Morgan Inc.s total corporate value is $325 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stocks price per share? a. $15.02 b. $15.84 c. $14.85 d. $16.50 e. $12.54

Q: Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $725 million. Its balance sheet shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of its stock price per share? a. $20.20 b. $18.18 c. $21.21 d. $22.83 e. $24.44

Q: Based on the corporate valuation model, Gray Entertainment's total corporate value is $1,175 million. The companys balance sheet shows $120 million of notes payable, $300 million of long-term debt, $50 million of preferred stock, $180 million of retained earnings, and $800 million of total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of its price per share? a. $24.44 b. $27.97 c. $23.50 d. $28.20 e. $29.38

Q: Based on the corporate valuation model, Wang Inc.s total corporate value is $800 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firms value of equity (in millions)? a. $520 b. $500 c. $380 d. $400 e. $415

Q: Ryan Enterprises forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firms total corporate value (in millions)? Do not round intermediate calculations. Year 1 2 3 FCF -$15.0 $10.0 $55.0 u200b a. $564.95 b. $660.88 c. $522.31 d. $442.37 e. $532.97

Q: Kale Inc. forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, then what is the firms total corporate value (in millions)? Do not round intermediate calculations. Year 1 2 Free Cash flow -$50 $145 u200b a. $2,260 b. $2,452 c. $2,345 d. $1,876 e. $2,132

Q: Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $38 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 14.0%, what is the firms total corporate value, in millions? Do not round intermediate calculations. a. $375.72 b. $308.33 c. $357.83 d. $324.56 e. $340.79

Q: You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations. a. $34.23 b. $42.90 c. $53.30 d. $42.03 e. $43.33

Q: You must estimate the intrinsic value of Noe Technologies stock. The end-of-year free cash flow (FCF1) is expected to be $23.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The companys WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations. a. $33.79 b. $43.89 c. $44.77 d. $52.67 e. $44.33

Q: Misra Inc. forecasts a free cash flow of $80 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of equity is 15.0%, then what is the horizon, or continuing, value in millions at t = 3? a. $1,876 b. $1,763 c. $1,744 d. $2,251 e. $2,063

Q: Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $25.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5? a. $387 b. $421 c. $562 d. $484 e. $402

Q: Sorenson Corp.s expected year-end dividend is D1 = $1.90, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ? Do not round intermediate calculations. a. $37.87 b. $50.35 c. $47.68 d. $38.77 e. $44.56

Q: Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $80.00 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? a. $3.40 b. $4.25 c. $3.57 d. $3.23 e. $2.89

Q: Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $33.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0? a. $1.64 b. $1.50 c. $1.29 d. $1.39 e. $1.42

Q: Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 0.75, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price? Do not round intermediate calculations. a. $27.80 b. $28.76 c. $31.63 d. $31.95 e. $33.23

Q: The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.65, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0? Do not round intermediate calculations. a. $10.08 b. $11.72 c. $13.83 d. $12.66 e. $13.60

Q: The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 0.85, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price? Do not round intermediate calculations. a. $49.53 b. $54.21 c. $46.73 d. $47.66 e. $51.40

Q: Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $4.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell? a. $61.54 b. $64.62 c. $48.00 d. $52.92 e. $63.38

Q: Suppose Boyson Corporations projected free cash flow for next year is FCF1 = $250,000, and FCF is expected to grow at a constant rate of 6.5%. Assume the firm has zero non-operating assets. If the companys weighted average cost of capital is 11.5%, then what is the firms total corporate value? a. $3,850,000 b. $4,000,000 c. $5,000,000 d. $5,050,000 e. $4,200,000

Q: Mooradian Corporations free cash flow during the just-ended year (t = 0) was $160 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 12.5%, what is the firms total corporate value, in millions? a. $2,240 b. $2,374 c. $2,710 d. $2,016 e. $2,778

Q: Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now? a. $41.87 b. $52.33 c. $46.89 d. $40.61 e. $36.42

Q: Reddick Enterprises' stock currently sells for $50.00 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today? a. $71.04 b. $71.63 c. $58.71 d. $68.69 e. $61.65

Q: Gray Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $22.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate? a. 5.88% b. 4.25% c. 4.30% d. 4.90% e. 4.94%

Q: If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $34.00, then what is the stocks expected total return for the coming year? a. 8.58% b. 8.93% c. 7.41% d. 9.20% e. 6.97%

Q: If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $36, then what is the stocks expected total return for the coming year? a. 7.99% b. 7.00% c. 7.54% d. 8.88% e. 8.97%

Q: If D1 = $1.50, g (which is constant) = 2.5%, and P0 = $56, then what is the stocks expected capital gains yield for the coming year? a. 3.08% b. 1.95% c. 2.98% d. 2.50% e. 2.83%

Q: If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $52, then what is the stocks expected dividend yield for the coming year? a. 3.36% b. 3.81% c. 4.61% d. 4.48% e. 4.25%

Q: If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $30.00, then what is the stocks expected dividend yield for the coming year? a. 4.13% b. 3.17% c. 4.17% d. 3.25% e. 3.38%

Q: A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 10.2%, then what is the stock price? a. $23.93 b. $21.96 c. $24.37 d. $23.50 e. $16.47

Q: A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 9.0%, and the constant growth rate is g = 4.0%. What is the current stock price? a. $32.14 b. $34.32 c. $27.14 d. $36.19 e. $31.20

Q: A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 8.6%. What is the stock's current price? a. $36.32 b. $37.11 c. $39.47 d. $43.03 e. $47.76

Q: The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT? a. If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. b. If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X. c. If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. d. The stocks must sell for the same price. e. Stock Y must have a higher dividend yield than Stock X.

Q: Which of the following statements is CORRECT? a. If a company has two classes of common stock, Class A and Class B, then the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights. b. The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company. c. The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. d. The stock valuation model, P0 = D1/(rs - g), cannot be used for firms that have negative growth rates. e. The stock valuation model, P0 = D1/(rs - g), can be used only for firms whose growth rates exceed their required returns.

Q: For a stock to be in equilibriumthat is, for there to be no long-term pressure for its price to changethe a. expected future return must be less than the most recent past realized return. b. past realized return must be equal to the expected return during the same period. c. required return must equal the realized return in all periods. d. expected return must be equal to both the required future return and the past realized return. e. expected future return must be equal to the required return.

Q: Which of the following statements is CORRECT? a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firms common stock. As a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. d. One of the disadvantages to a corporation of owning preferred stock is that 50% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds is tax free. e. One of the advantages to financing with preferred stock is that 50% of the dividends paid out are tax deductible to the issuer.

Q: Which of the following statements is CORRECT? a. Preferred stockholders have a priority over bondholders to the income in the event of a bankruptcy, but not to the proceeds in the event of a liquidation. b. The preferred stock of a given firm is generally less risky to investors than the same firms common stock. c. Corporations cannot buy the preferred stocks of other corporations. d. Preferred dividends are not generally cumulative. e. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

Q: Which of the following statements is CORRECT? a. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. b. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. c. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. d. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. e. The corporate valuation model requires the assumption of a constant growth rate in all years.

Q: Which of the following statements is NOT CORRECT? a. The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. b. The corporate valuation model discounts free cash flows by the required return on equity. c. The corporate valuation model can be used to find the value of a division. d. An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. e. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.

Q: Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta 1.10 0.90 Constant growth rate 7.00% 7.00% u200b a. Stock A must have a higher stock price than Stock B. b. Stock A must have a higher dividend yield than Stock B. c. Stock Bs dividend yield equals its expected dividend growth rate. d. Stock B must have the higher required return. e. Stock B could have the higher expected return.