# If the required return on equity

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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