Ch 7 Practice Q's-Answers

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Practice Questions for CHAPTER 7 1. Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $22.60, and Coolibah's equity cost of capital is 18%, what price would you expect Coolibah's stock to sell for at the end of three years? A) $28.87 B) $31.76 C) $33.20 D) $34.64 2. Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital? A) 7.17% B) 8.60% C) 14.33% D) 17.91% 3. A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A) 3.48% B) 8.70% C) 13.91% D) 17.39% 4. Valorous Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today? A) $32.38 B) $36.19 C) $38.09 D) $39.99

1 5. A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future? A) $8.86 B) $14.18 C) $14.62 D) $15.06 6. NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to ________. A) $9.60 B) $14.40 C) $13.20 D) $12.00 7. You expect KT Industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTI's dividends is closest to ________. A) 11.3% B) 9.8% C) 5.9% D) 3.9% 8. You expect KT industries (KTI) will have earnings per share of $4 this year and expect that they will pay out $1.75 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13% and their equity cost of capital is 10%. The value of a share of KTI's stock today is closest to ________. A) $78.14 B) $39.07 C) $65.12 D) $26.05 9. A company has stock which costs $41.50 per share and pays a dividend of $2.50 per share this year. The company's cost of equity is 7%. What is the expected annual growth rate of the company's dividends? A) 0.98% B) 1.96% C) 2.94% D) 3.92%

2 10. You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 10%, then the price of a share of Bean's stock is closest to ________. A) $24.82 B) $16.54 C) $41.36 D) $66.18 11. Which of the following will NOT increase a company's dividend payments (per share)? A) It can issue more shares. B) It can increase its earnings. C) It can decrease the number of shares outstanding. D) It can increase its dividend payout rate. 12. Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%? A) $6.46 B) $6.92 C) $9.23 D) $10.15 13. A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A) 3.48% B) 8.70% C) 13.91% D) 17.39%

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Related Questions

Coolibah Holdings is expected to pay dividends of $1.30 every six months for the next three years. If the current price of Coolibah stock is $22.40, and Coolibah's equity cost of capital is 16%, what price would you expect Coolibah's stock to sell for at the end of three years? O A. $29.91 O B. $31.21 O C. $26.01 O D. $28.61
Coolibah Holdings is expected to pay dividends of $1.00 every six months for the next three years. If the current price of Coolibah stock is $21.40, andCoolibah's equity cost of capital is 16%, what price would you expect Coolibah's stock to sell for at the end of three years? A. $26.62 B. $31.94 C. $29.28 D. $30.61

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