Chapter 18 Equity Valuation Models
46. What is the return you should require on Torque's stock? A) 12.0% B) 14.6% C) 15.6% D) 20% E) none of the above
Answer: B Difficulty: Moderate
Rationale: 5% + 1.2(13% - 5%) = 14.6%.
47. What is the intrinsic value of Torque's stock? A) $14.29 B) $14.60 C) $12.33 D) $11.62 E) none of the above
Answer: D Difficulty: Difficult
Rationale: k = 5% + 1.2(13% - 5%) = 14.6%; P = 1 / (.146 - .06) = $11.62.
48. Midwest Airline is expected to pay a dividend of $7 in the coming year. Dividends are
expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00. The return you should require on the stock is ________.
A) 10% B) 18% C) 30% D) 42% E) none of the above
Answer: C Difficulty: Moderate
Rationale: 6% + 3(14% - 6%) = 30%.
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49. Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year.
Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of -0.25. The return you should require on the stock is ________.
A) 2% B) 4% C) 6% D) 8% E) none of the above
Answer: B Difficulty: Moderate
Rationale: 6% + [-0.25(14% - 6%)] = 4%.
50. High Tech Chip Company is expected to have EPS in the coming year of $2.50. The
expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be
A) 5.00% B) 6.25% C) 6.60% D) 7.50% E) 8.75%
Answer: E Difficulty: Easy
Rationale: 12.5% X 0.7 = 8.75%.
51. A company paid a dividend last year of $1.75. The expected ROE for next year is
14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be
A) $1.80 B) $2.12 C) $1.77 D) $1.94 E) none of the above
Answer: D Difficulty: Moderate
Rationale: g = .155 X .75 = 10.875%; $1.75(1.10875) = $1.94
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52. High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for
next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be
A) $1.00 B) $2.50 C) $2.69 D) $2.81 E) none of the above
Answer: C Difficulty: Moderate
Rationale: g = .125 X .6 = 7.5%; $2.50(1.075) = $2.69
53. Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is
expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be _____.
A) $28.12 B) $35.55 C) $60.00 D) $72.00 E) none of the above
Answer: C Difficulty: Easy
Rationale: 20 X $3.00 = $60.00.
54. Suppose that the average P/E multiple in the oil industry is 22. Exxon Oil is expected to
have an EPS of $1.50 in the coming year. The intrinsic value of Exxon Oil stock should be _____.
A) $33.00 B) $35.55 C) $63.00 D) $72.00 E) none of the above
Answer: A Difficulty: Easy
Rationale: 22 X $1.50 = $33.00.
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55. Suppose that the average P/E multiple in the oil industry is 16. Mobil Oil is expected to
have an EPS of $4.50 in the coming year. The intrinsic value of Mobil Oil stock should be _____.
A) $28.12 B) $35.55 C) $63.00 D) $72.00 E) none of the above
Answer: D Difficulty: Easy
Rationale: 16 X $4.50 = $72.00.
56. Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to
have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be _____.
A) $28.12 B) $93.50 C) $63.00 D) $72.00 E) none of the above
Answer: B Difficulty: Easy
Rationale: 17 X $5.50 = $93.50.
57. An analyst has determined that the intrinsic value of HPQ stock is $20 per share using
the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is ______.
A) $3.63 B) $4.44 C) $0.80 D) $22.50 E) none of the above
Answer: C Difficulty: Easy
Rationale: $20(1/25) = $0.80.
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58. An analyst has determined that the intrinsic value of Dell stock is $34 per share using
the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year is ______.
A) $3.63 B) $4.44 C) $14.40 D) $1.26 E) none of the above
Answer: D Difficulty: Easy
Rationale: $34(1/27) = $1.26.
59. An analyst has determined that the intrinsic value of IBM stock is $80 per share using
the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is ______.
A) $3.64 B) $4.44 C) $14.40 D) $22.50 E) none of the above
Answer: A Difficulty: Easy
Rationale: $80(1/22) = $3.64.
60. Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming
year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is ______.
A) $80.00 B) 133.33 C) $200.00 D) $400.00 E) none of the above
Answer: B Difficulty: Difficult
Rationale: k = 6% + [-0.25(14% - 6%)] = 4%; P = 8 / [.04 - (-.02)] = $133.33.
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