9 Finance Questions 1 Boehm Incorporated is expected to pay a $3.00 per share dividend at the end of this year (i.e., D1 = $3.00). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock, rs, is 18%. What is the value per share of the company’s stock? Round your answer to the nearest cent.____________ 2 A company currently pays a dividend of $3.25 per share, D0 = 3.25. It is estimated that the company’s dividend will grow at a rate of 16% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company’s stock has a beta equal to 1.65, the risk-free rate is 7 percent, and the market risk premium is 4 percent. What is your estimate is the stock’s current price? Round your answer to the nearest cent.____% 3 A stock is trading at $75 per share. The stock is expected to have a year-end dividend of $2 per share (D1 = 2), and it is expected to grow at some constant rate g throughout time. The stock’s required rate of return is 14 percent. If markets are efficient, what is your forecast of g? Round the answer to the nearest hundredth.______% 4 You are considering an investment in Crisp’s Cookware’s common stock. The stock is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25); its beta is 0.95; the risk-free rate is 2.7 %; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years (i.e., what is P ? ? 3 )? Round your answer to the nearest cent. $_________ 5 Brushy Mountain Mining Company’s ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 5% per year. If D0 = $2 and rs = 9%, what is the value of Brushy Mountain Mining’s stock? Round your answer to the nearest cent. $______ 6 The beta coefficient for Stock C is bC = 0.3, and that for Stock D is bD = – 0.3. (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.) 1. If the risk-free rate is 6%and the expected rate of return on an average stock is 14%, what are the required rates of return on Stocks C and D? Round the answers to two decimal places. a. rC = _____?% b. rD = ______% 2. For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock is not in equilibrium. ——– I. In this situation, the expected rate of return = 8.40%. However, the required rate of return is 10%. Investors will seek to buy the stock, raising its price to $34.09. At this price, the stock will be in equilibrium. II. In this situation, the expected rate of return = 10%. However, the required rate of return is 8.40%. Investors will seek to sell the stock, raising its price to $34.09. At this price, the stock will be in equilibrium. III. In this situation, the expected rate of return = 8.40%. However, the required rate of return is 10%. Investors will seek to sell the stock, raising its price to $34.09. At this price, the stock will be in equilibrium. IV. In this situation, the expected rate of return = 10%. However, the required rate of return is 8.40%. Investors will seek to buy the stock, raising its price to $34.09. At this price, the stock will be in equilibrium. V. In this situation, both the expected rate of return and the required rate of return are equal. Therefore, the stock is in equilibrium at its current price. 7 Assume that the average firm in your company’s indust…
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