# Chapter 9 Problems

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- Chapter 9 Problems

**Created:**2011-10-26

**Last Modified:**2011-12-14

[i]. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is r_{s} = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

[ii]. A stock just paid a dividend of D_{0} = $1.50. The required rate of return is r_{s} = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

[iii]. 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 11.4%, what is the stock price?

a. $16.28 b. $16.70 c. $17.13 d. $17.57 e. $18.01[iv]. If D_{1} = $1.25, g (which is constant) = 4.7%, and P_{0} = $26.00, what is the stock’s expected dividend yield for the coming year?

[v]. If D_{0} = $2.25, g (which is constant) = 3.5%, and P_{0} = $50, what is the stock’s expected dividend yield for the coming year?

[vi]. If D_{1} = $1.50, g (which is constant) = 6.5%, and P_{0} = $56, what is the stock’s expected capital gains yield for the coming year?

[vii]. If D_{1} = $1.25, g (which is constant) = 5.5%, and P_{0} = $44, what is the stock’s expected total return for the coming year?

[viii]. If D_{0} = $1.75, g (which is constant) = 3.6%, and P_{0} = $32.00, what is the stock’s expected total return for the coming year?

[ix]. Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D_{1} = $1.25). The stock sells for $32.50 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?

[x]. Reddick Enterprises' stock currently sells for $35.50 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, r_{s}, is 9.00%. What is the stock's expected price 3 years from today?

[xi]. Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, r_{s}, is 11.50%. What is the stock's expected price 5 years from now?

[xii]. Mooradian Corporation’s free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what is the firm’s value of operations, in millions?

[xiii]. Suppose Boyson Corporation’s projected free cash flow for next year is FCF_{1} = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the value of its operations?

[xiv]. Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

[xv]. The Francis Company is expected to pay a dividend of D_{1} = $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 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

[xvi]. 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 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P_{0}?

[xvii]. Schnusenberg Corporation __just paid__ a dividend of D_{0} = $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 1.25, 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?

[xviii]. Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the __last__ dividend, D_{0}?

[xix]. Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D_{1}?

*$37.52*

_{1}= $1.60, its required return is r

_{s}= 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

*?*

*$1,259*

[xxi]. 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 $65.00 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 terminal) value (in millions) at t = 5?

*$821*

[xxii]. Misra Inc. forecasts a free cash flow of $35 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%, what is the horizon, or terminal, value in millions at t = 3?

*$43.33*

[xxiii]. You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cash flow (FCF_{1}) is expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company’s 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. What is the firm's estimated intrinsic value per share of common stock?

*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 (FCF*

_{1}) 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. What is the firm's estimated intrinsic value per share of CS?*$210.53*

[xxv]. Kedia Inc. forecasts a negative free cash flow for the coming year, FCF_{1} = -$10 million, but it expects positive numbers thereafter, with FCF_{2} = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm’s value of operations, in millions?

*$1,456*

[xxvi]. Kale Inc. forecasts the free cash flows (in millions) shown below. 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, what is the Year 0 value of operations, in millions?

__Year 1 2__

Free cash flow -$50 $100

*$386.13*

[xxvii]. Ryan Enterprises forecasts the free cash flows (in millions) shown below. 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 Year 0 value of operations, in millions?

__Year 1 2 3__

FCF -$15.0 $10.0 $40.0

*$450*

[xxviii]. Based on the corporate valuation model, Wang Inc.’s value of operations is $750 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 firm’s value of equity, in millions?

*$24.33*

[xxix]. Based on the corporate valuation model, Gay Entertainment's value of operations is $1,200 million. The company’s 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?

*$27.20*

[xxx]. Based on the corporate valuation model, the value of Chen Lin Inc.’s operations is $900 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?

*$14.00*

[xxxi]. Based on the corporate valuation model, Morgan Inc.’s value of operations is $300 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 stock’s price per share?

*8.89%*

[xxxii]. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its __nominal__ (not effective) annual rate of return?

*7.47%*

[xxxiii]. Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its __effective__ annual (not nominal) rate of return?

*$44.87*

[xxxiv]. Nachman Industries just paid a dividend of D_{0} = $1.32. 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 stock’s current market value?

*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 25% 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 company’s last dividend, D*_{0}, 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?*$42.64*

[xxxvi]. The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r_{s}) is 12%. What is the best estimate of the current stock price?

*$37.05*

[xxxvii]. Ackert Company's last dividend was $1.55. 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 (r_{s}) is 12.0%. What is the best estimate of the current stock price?

*$33.50*

[xxxviii]. Huang Company's last dividend was $1.25. 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 firm's required return (r_{s}) is 11%, what is its current stock price?

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. 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 Year 0 value of operations, in millions?

__Year 1 2 3__

Free cash flow -$20.00 $48.00 $54.00

Savickas Petroleum’s stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D_{4} = $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 stock’s expected constant growth rate after t = 4, i.e., what is X?

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