Please use the following information for questions 5-8. Stock A pays an earnings
ID: 2790737 • Letter: P
Question
Please use the following information for questions 5-8. Stock A pays an earnings of $5 per share in year 1. The return on equity is 20%. The discount rate is 10%.
5. If there is no plow-back, what is the stock price now (P0) ? A) $40 B) $50 C) $60 D) $70 E) None of the above
6. If there is a plow-back of 40%, what is the dividend per share at year 1 (Div1)? A) $5 B) $4 C) $6 D) $3 E) None of the above
7)If there is a plow-back of 40%, what would be the price for stock A one year from now (P1)? A) $150 B) $162 C) $172 D) $ 182 E) None of the above
8)If there is a plow-back of 40%, what is the earnings per share at year 2? A) $5.0 B) $5.4 C) $5.8 D) $6.2 E) None of the above
9. According to the dividend discount model, the current value of a stock is equal to the: A) present value of all expected future dividends. B) sum of all future expected dividends. C) next expected dividend, discounted to the present. D) discounted value of all dividends growing at a constant rate. E) none of the above
10. If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock’s current price? A) $4.50 B) $18.00 C) $22.22 D) $40.50 E) None of the above
11. A stock paying $5 in annual dividends sells now for $100 and has an expected return of 20%. What might investors expect to pay for the stock one year from now? A) $182.00 B) $186.00 C) $115.00 D) $110.00 E) None of the above
12. How much should you pay for a share of stock that offers a constant dividend growth rate of 10%, has a discount rate of 16%, and pays a dividend of $3 next year? A) $42.00 B) $45.00 C) $45.45 D) $50.00 E) none of the above
13. The price of a stock will likely increase if: A) the investment horizon decreases. B) the growth rate of dividends increases. C) the discount rate increases. D) dividends are discounted back to the present. E) none of the above
14. What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? A) $22.86 B) $28.00 C) $42.00 D) $43.75 E) None of the above
15. What is the plowback ratio for a stock with current price of $30, earnings of $5 per share next year, a discount rate of 20% , and a rate of return on equity of 25% ? A) 0.5 B) 0.2 C) 0.4 D) 0.1 E) None of the above
16. What is the expected constant growth rate of dividends for a stock currently priced at $50, that is expected to pay a dividend of $5 next year, and has a required return of 20%? A) 13% B) 10% C) 11% D) 12% E) none of the above 17. If the (current) dividend yield is 5% and the stock price is $25, what will the year three dividend be if dividends grow at a constant 6%? A) $1.33 B) $1.49 C) $1.58 D) $1.67 E) none of the above
Explanation / Answer
5. As no plow back D1=5 & reqd.return=0.10,so,5/0.1=50 ANSWER: B-- $ - 50 6. If plowback ratio is 40% , then dividend pay-out =(1-40%)=60% So,dividend/share=60%*EPS 5 = $ 3 ANSWER: D. $ 3 7. Dividend growth rate= Plowback(retention) ratio*ROE ie. 40%*20%=8% Stock price 1 year from now= D1/(k-g) ie. 3/(0.1-0.08)= 150 8. EPS(Yr.2)=5*(1+8%)= 5.4 Answer-- B: $ 5.4 9. According to the dividend discount model, the current value of a stock is equal to theA) present value of all expected future dividends 10. P/3=13.5; P=13.5*3= 40.5 ANSWER: D 11. Expected return 20%=(5+P-100)/100 --- P= $ 115 ANSWER: C. 115 12. As per Dividend Discount Model, Stock Price= Next divdend/(reqd.return-Growth rate) So,Price=3/(0.16-0.10)= $ 50 (ANSWER: D ) 13. The price of a stock will likely increase if: B) the growth rate of dividends increases. 14. 3.50/(0.08-0)= $ 43.75 ----- (ANSWER: D) 16. P(0)= D1/k-g 50=5/(0.20-g) -------g= 10% ANSWER: B 17. $ dividend= 25*5%= 1.25 Year 3 dividend=1.25*(1+0.06)^3= 1.49 ANSWER: B