# If the required return on equity

June 1, 2016

Question

10 questions, 1 point each, 10 points total.
Multiple-choice: Choose the one best answer.
1.
If the required return on equity is 12%, find the value of a stock that is expected to pay a \$1.50 dividend at the end of
the year and has an expected growth rate of dividends of 5%.
A. \$12.45
B. \$21.43
C. \$22.50
D. \$12.50
E. none of the above
2.
Calculate the price one year ago for a stock that sells today for \$45, just paid an annual dividend of \$2.50, and
experienced a 20% return over the past year. Ignore taxes.
A. \$56.25
B. \$37.50
C. \$39.58
D. \$35.42
E. none of the above
3.
If the required return is 10%, find the current value of a stock that just paid a \$2 dividend and has an expected growth
rate of dividends of 5%.
A. \$21
B. \$42
C. \$40
D. \$20.95
E. none of the above
4.
Find the value of a stock that is expected to pay a \$2 dividend in one year. The dividend is not expected to grow. The
required return is 10% APR.
A. \$19.90
B. \$20
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C. \$0.20
D. \$1.82
E. none of the above
5.
Find the required return on equity for a \$30 stock that just paid a \$2 dividend and has an expected growth rate of
dividends of 4%.
A. 6.93%
B. 10.93%
C. 10.67%
D. 2.93%
E. none of the above
6.
Calculate the payout ratio for a firm with a growth rate in dividends of 5% and a required return on equity of 20%.
A. 25%
B. 75%
C. 15%
D. 85%
E. none of the above

Use the following information to answer Questions 7 and 8.
A company plans to pay a \$4 dividend next year, which represents 100% of expected earnings. This will provide investors
with a 15% expected return. Alternatively, the company could plow back 40% of the earnings at the firm’s current return on
equity of 15%.
7.
What is the value of the stock before the plowback decision?
A. \$40
B. \$13.33
C. \$44.44
D. \$26.67
E. none of the above
8.
What is the value of the stock after the plowback decision?
A. \$40
B. \$13.33
C. \$44.44
D. \$26.67
E. none of the above
9.
The XYZ Company just paid a dividend of \$1.50 per share (from earnings of \$3 per share). The required return on
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equity is 20%. What is their present value of growth opportunities?
A. \$1.50
B. \$0.50
C. \$7.50
D. \$9.00
E. none of the above
10.
Your stock just paid a \$1 dividend. Dividends are paid once per year. For the next two years, dividends are expected to
grow at a super high rate of 15%, then fall back to the long-term rate of 5%. If the required return is 8%, what is the
correct price for this stock today?
A. \$46.29
B. \$38.95
C. \$56.21
D. \$41.88
E. none of the above
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