Question #1 of 131 Question ID: 1472901

Relative to traditional financial models like the dividend discount model, the biggest
advantage of spreadsheet modeling is:

A) simplicity of computations.
B) accuracy of computations.
C) quantity of computations.

Question #2 of 131 Question ID: 1472872

Which of the following models would be most appropriate for a firm that is expected to grow
at an initial rate of 10%, declining steadily to 6% over a period of five years, and to remain
steady at 6% thereafter?

A) The H-model.
B) A two-stage model.
C) The Gordon growth model.

Question #3 of 131 Question ID: 1472808

If an asset was fairly priced from an investor's point of view, the holding period return (HPR)
would be:

A) the same as the required return.

B) lower than the required return.
C) equal to the alpha returns.

Question #4 of 131 Question ID: 1472851

Which of the following would be least appropriate to value using the Gordon growth model?

A) Broad-based equity indices.

B) Water utility companies.
C) Profitable rapidly-growing companies.

Question #5 of 131 Question ID: 1472868

A firm has the following characteristics:

Current share price $100.00.

One-year earnings $3.50
One-year dividend $0.75.
Required return 13%.
Justified leading price to earnings 10.

Based on the dividend discount model, what is the firm's assumed growth rate?

A) 8.6%.
B) 12.4%.
C) 10.9%.

Question #6 of 131 Question ID: 1472906

If we increase the required rate of return used in a dividend discount model, the estimate of
value produced by the model will:

A) increase.
B) decrease.
C) remain the same.

Question #7 of 131 Question ID: 1472880

Kyle Star Partners is expected to have earnings in year five of $6.00 per share, a dividend
payout ratio of 50%, and a required rate of return of 11%. For year 6 and beyond the
dividend growth rate is expected to fall to 3% in perpetuity. Estimate the terminal value at
the end of year five using the Gordon growth model.

A) $37.50.
B) $27.27.
C) $38.63.

Question #8 of 131 Question ID: 1472865

A firm has the following characteristics:

Current share price $100.00.

Next year's earnings $3.50.
Next year's dividend $0.75.
Growth rate 11%.
Required return 13%.

Based on this information and the Gordon growth model, what is the firm's justified leading
price to earnings (P/E) ratio?

A) 10.7.
B) 11.3.
C) 8.7.

Question #9 of 131 Question ID: 1472852

Applying the Gordon growth model to value a firm experiencing supernormal growth would
result in:

A) understating the value of the firm.

B) overstating the value of the firm.
C) a zero value.
Question #10 of 131 Question ID: 1472923

Sustainable growth is the rate that earnings can grow:

A) with the current assets.

B) indefinitely without altering the firm's capital structure.
C) without additional purchase of equipment.

Question #11 of 131 Question ID: 1472884

A company's stock beta is 0.76, the market return is 10%, and the risk-free rate is 4%. The
stock will pay no dividends for the first two years, followed by a $1 dividend and $2 dividend,
respectively. An investor expects to sell the stock for $10 at the end of four years. What price
is an investor willing to pay for this stock?

A) $9.42.
B) $11.03.
C) $10.16.

Question #12 of 131 Question ID: 1472817

Which of the following is least likely a limitation of the two-stage dividend discount model
(DDM)?

A) most of the value is due to the terminal value.

B) the length of the high-growth stage is difficult to measure.
C) Terminal value estimate is most sensitive to estimates of future dividends.

Question #13 of 131 Question ID: 1472877

An analyst has collected the following data on two companies:

Middle Hickory Co. Lower Elm Inc.

FCFE Negative Positive and growing

Capital investment Significant Decreasing

Which dividend-discount model is the best option for valuing the two companies?

Middle Hickory Lower Elm

A) Three-stage Two-stage

Gordon
B) Two-stage
Growth

Gordon
C) Three-stage
Growth

Question #14 of 131 Question ID: 1472922

GreenGrow, Inc., has current dividends of $2.00, current earnings of $4.00 and a return on
equity of 16%. What is GreenGrow's sustainable growth rate?

A) 8%.
B) 9%.
C) 6%.

Question #15 of 131 Question ID: 1472924

The sustainable growth rate, g, equals:

A) earnings retention rate times the return on equity.

B) dividend payout rate times the return on assets.
C) pretax margin divided by working capital.
Question #16 of 131 Question ID: 1472882

An analyst has compiled the following financial data for ABC, Inc.:

ABC, Inc. Valuation Scenarios

Item Scenario 1 Scenario 2 Scenario 3 Scenario 4

Year 0 Dividends per

$1.50 $1.50 $1.50 $1.50
Share

Long-term Treasury
4.0% 4.0% 5.0% 5.0%
Bond Rate

Expected Return on the

12.0% 12.0% 12.0% 12.0%
S&P 500

Beta 1.4 1.4 1.4 1.4

Year 1, g=20%

Year 2, g=18%

Years 1-3, Year 3, g=16%

g (growth rate in g=12.0% Year 4, g=9%

0.0% 3.0%
dividends) After Year 3, Year 5, g=8%
g=3.0%
Year 6, g=7%

After Year 6,
g=4%

If year 0 dividend is $1.50 per share, the required rate of return of shareholders is 15.2%,
what is the value of ABC, Inc.'s stock price using the H-Model? Assume that the growth in
dividends has been 20% for the last 8 years, but is expected to decline 3% per year for the
next 5 years to a stable growth rate of 5%.

A) $19.85.
B) $20.95.
C) $24.26.

Q ti #17 f 131
Question #17 of 131 Question ID: 1472909

In using the capital asset pricing model (CAPM) to determine the appropriate discount rate
for discounted cash flow models (DCFs), the asset's beta is used to determine the amount of:

A) risk-free rate applicable to the time period of the investment.

B) equity premium.
C) the expected return in addition to the return required by the risk of the position.

Question #18 of 131 Question ID: 1472849

The Gordon growth model is most likely to produce useful results when the dividend growth
rate is:

A) negative.
B) greater than the required rate of return.
C) equal to the required rate of return.

Question #19 of 131 Question ID: 1472825

An analyst has compiled the following financial data for ABC, Inc.

ABC, Inc. Valuation Scenarios

Item Scenario 1 Scenario 2 Scenario 3 Scenario 4

Year 0 Dividends
$1.50 $1.50 $1.50 $1.50
per Share

Long-term
Treasury Bond 4.0% 4.0% 5.0% 5.0%
Rate

Expected Return
12.0% 12.0% 12.0% 12.0%
on the S&P 500

Beta 1.4 1.4 1.4 1.4

Year 1, g=20%

Year 2, g=18%

Years 1-3, Year 3, g=16%

g (growth rate in g=12.0% Year 4, g=9%

0.0% 3.0%
dividends) After Year 3, Year 5, g=8%
g=3.0%
Year 6, g=7%

After Year 6,
g=4%

What is the value of ABC, Inc.'s stock price using the assumptions contained in Scenario 4?

A) $18.52.
B) $22.22.
C) $26.66.

Question #20 of 131 Question ID: 1472837

Suppose the equity required rate of return is 10%, the dividend just paid is $1.00 and
dividends are expected to grow at an annual rate of 6% forever. What is the expected price
at the end of year 2?

A) $27.07.
B) $29.78.
C) $28.09.

A team of analysts at WSM investments are currently analyzing the equity value of Shotput
Inc., which they believe may be a potential takeover target for some of its rivals. Three of the
analysts, Jeff Capes, CFA, Sven Karlson, CFA, and Zydrunas Savickas, CFA, are using the
dividend discount model to try to value the company.

Jeff Capes, CFA, decided to use the constant growth Dividend Discount Model (DDM) to
estimate the equity value. He is using the following information from Shotput's financial
statements for the year just ended:

Income Statement $m

Revenues 850

COGS 580

SG&A 200

Depreciation expense 50

Earnings before tax 20

Taxes 10

Net income 10

Dividend 6
 Balance Sheet $m

Cash 10

Accounts receivable 450

Prepaid expenses 50

Fixed assets 400

Total assets 910

Current liabilities 550

Long-term debt 156

Equity 204

Total liabilities & equity 910

In order to calculate Return on Equity, Jeff calculates and uses the opening equity figure of
$200m.

Capes has identified a company in the same industry, Discus Inc., which has the same size
and risk characteristics as Shotput. He has decided to use the following information on
Discus to estimate a required return for equity holders of Shotput:

Equity market value $62.94m

Dividend just paid $5.5m

Sustainable growth rate 3%

Capes is also interested in calculating the present value of growth opportunities (PVGO) for
Shotput. He is proposing to use the last dividend paid by Shotput and divide it by the
required rate of return to get the value of its assets in place, and compare this to the
fundamental value to get PVGO.

Sven Karlson, CFA, is also estimating an equity value for Shotput using the DDM. He has
estimated a required return for equity of 11% using the Capital Asset Pricing Model. He has
also picked up the dividends just paid as $6m from the financial statements.

Karlson, however, is uncertain about how dividends will grow and feels that Shotput has a
competitive advantage over its rivals in the short term, which will lead to increased dividend
growth for the next few years. He has therefore assumed that for the first three years the
dividend growth rate will be 7% p.a., and then will decline linearly over the next six years to
2% p.a., a growth rate that will then be sustained for the foreseeable future.

Zydrunas Savickas, however, has questioned the use of the DDM for the purposes of their
research. They are hoping to present their findings to one of Shotput's competitors who they
feel may be in a position to launch a takeover bid and realize a gain from Shotput's current
undervaluation.

Savickas states, "While I accept that a benefit of the dividend discount model is that the
resulting valuation is not very sensitive to changes in the required rate of return assumption,
as we are looking at a potential takeover, it may be more appropriate to consider a free cash
flow model. The dividend discount model is most appropriate from the perspective of a
minority shareholder."

Question #21 - 24 of 131 Question ID: 1472896

Using Shotput's financial statements and Jeff Cape's estimates, calculate an equity value for
Shotput using the constant growth DDM:

A) $60.0m.
B) $61.2m.
C) $66.7m.

Question #22 - 24 of 131 Question ID: 1472897

Calculate an equity value using the assumptions made by Karlson (to the nearest $m):

A) $73m.
B) $79m.
C) $87m.

Question #23 - 24 of 131 Question ID: 1472898

Is Savickas correct in his comments regarding the DDM?

He is correct about the minority perspective, but not the sensitivity to the required
A)
rate of return assumption.
He is correct about the minority perspective and the required rate of return
B)
assumption.
C) He is incorrect in both statements.

Question #24 - 24 of 131 Question ID: 1472899

What adjustment to his calculation method does Capes need to make in to correctly
calculate PVGO?

The value of assets in place is given by the previous dividend multiplied by one plus
A)
the sustainable growth rate divided by the required rate of return.
The value of assets in place is given by earnings divided by the required rate of
B)
return.
The value of assets in place is given by earnings divided by the required rate of
C)
return minus the sustainable growth rate.

Question #25 of 131 Question ID: 1472860

Tri-coat Paints has a current market value of $41 per share with an earnings of $3.64. What
is the present value of its growth opportunities (PVGO) if the required return is 9%?

A) $0.56.
B) $3.92.
C) $1.27.
Question #26 of 131 Question ID: 1472846

A $100 par, perpetual preferred share pays a fixed dividend of 5.0%. If the required rate of
return is 6.5%, what is the current value of the shares?

A) $76.92.
B) $100.00.
C) $88.64.

Question #27 of 131 Question ID: 1472850

The Gordon growth model is well suited for:

A) utilities.
B) telecom companies.
C) biotech firms.

Question #28 of 131 Question ID: 1472886

An analyst has forecast that Hapex Company, which currently pays a dividend of $6.00, will
grow at a rate of 8%, declining to 5% over the next two years, and remain at that rate
thereafter. If the required return is 10%, based on an H-model what is the current value of
Hapex shares?

A) $131.17.
B) $126.24.
C) $129.60.

Question #29 of 131 Question ID: 1472807

If an investor were attempting to capture an asset's alpha returns, the expected holding
period return (HPR) would be:

A) higher than the required return.

B) the same as the required return.
C) lower than the required return.

Question #30 of 131 Question ID: 1472900

Financial models such as the DDM represent a cornerstone of equity valuation from an
academic standpoint. But in the real life, many analysts do not use the DDM. The least likely
reason for this is:

A) some of the assumptions required are impractical.

B) modern research has shown that many of the old standbys do not work.
C) the model lacks the flexibility required to model values in the real world.

Question #31 of 131 Question ID: 1472833

The value per share for Burton, Inc. is $32.00 using the Gordon Growth model. The company
paid a dividend of $2.00 last year. The estimates used to calculate the value have changed. If
the new required rate of return is 12.00% and expected growth rate in dividends is 6%, the
value per share will increase by:

A) 9.51%.
B) 10.42%.
C) 4.17%.

Question #32 of 131 Question ID: 1472863

The required rate of return for an asset is often difficult to determine, but if we know the
growth prospects and the current earnings of a firm we can determine the implied required
rate of return from the:
A) market price.
B) dividend rate.
C) earnings retention rate.

Question #33 of 131 Question ID: 1472905

Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the
dividend discount model can be used to calculate the required return for a stock, though
only if the growth rate remains constant. Hatchett maintains that while such models are
useful for calculating the value of a stock, they should not be used to calculate required
returns. Who is CORRECT?

Strong Hatchett

A) Correct Incorrect

B) Incorrect Incorrect

C) Incorrect Correct

Question #34 of 131 Question ID: 1472867

If an asset's beta is 0.8, the expected return on the equity market is 10%, the retention ratio
is 0.7, the dividend growth rate is 5%, and the appropriate discount rate for the Gordon
model is 9%, the risk-free rate must be closest to:

A) 5.0%.
B) 3.8%.
C) 2.5%.

Question #35 of 131 Question ID: 1472910

If we know the forecast growth rates for a firm's dividends and the current dividends and
current value, we can determine the:

A) sustainable growth rate.

B) net margin of the firm.
C) required rate of return.

Question #36 of 131 Question ID: 1472826

If a stock expects to pay dividends of $2.30 per share next year, what is the value of the
stock if the required rate of return is 12% and the expected growth rate in dividends is 4%?

A) $19.17.
B) $29.90.
C) $28.75.

Question #37 of 131 Question ID: 1472832

Jax, Inc., pays a current dividend of $0.52 and is projected to grow at 12%. If the required
rate of return is 11%, what is the current value based on the Gordon growth model?

A) $58.24.
B) unable to determine value using Gordon model.
C) $39.47.

Question #38 of 131 Question ID: 1472887

An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two
years, declining to 5% over the following three years, and then remaining at 5% thereafter. If
the current dividend is $4.00, and the required return is 10%, what is the current value of
Triple Crown shares based on a three-stage model?

A) $73.68.
B) $91.11.
C) $92.23.

Question #39 of 131 Question ID: 1472806

Historical information used to determine the long-term average returns from equity markets
may suffer from survivorship bias, resulting in:

A) deflating the mean return.

B) inflating the mean return.
C) unpredictable results.

Question #40 of 131 Question ID: 1472921

If a firm has a return on equity of 15%, a current dividend of $1.00, and a sustainable growth
rate of 9%, what are the firm's current earnings?

A) $2.50.
B) $1.50.
C) $1.75.

Question #41 of 131 Question ID: 1472862

Obsidian Glass Company has current earnings of $2.22, a required return of 8%, and the
present value of growth opportunities (PVGO) of $8.72. What is the current value of
Obsidian's shares?

A) $36.47.
B) $10.94.
C) $27.75.
Question #42 of 131 Question ID: 1472869

In which of the following stages is a firm most likely to distribute the highest proportion of
its earnings in the form of dividends?

A) Transition stage.
B) Initial growth stage.
C) Mature stage.

Question #43 of 131 Question ID: 1472876

Which of the following models would be most appropriate for a firm that is expected to grow
at 8% for the next three years, and at 6% thereafter?

A) The H-model.
B) The Gordon growth model.
C) A two-stage model.

Question #44 of 131 Question ID: 1472848

If the value of an 8%, fixed-rate, perpetual preferred share is $134, the risk free rate is 3%,
and the par value is $100, the required rate of return is closest to:

A) 9%.
B) 7%.
C) 6%.

Question #45 of 131 Question ID: 1472857

Zephraim Axelrod, CFA, is trying to determine whether Allegheny Mining is a good
investment. He decides to use the Gordon Growth model to calculate how much dividend
growth shareholders can expect. To that end, he determines the following:

Share price: $18.12.

Dividend: $0.32 per share.
Beta: 1.94.
Industry average estimated returns: 15%.
Risk-free rate: 5.5%.
Equity risk premium: 6.3%

Based only on the information above, the implied dividend growth rate is closest to:

A) 19.89%.
B) 15.68%.
C) 10.27%.

Question #46 of 131 Question ID: 1472932

The current market price per share for High-on-the-Hog, Inc. is $52.50, and an analyst is
using the Gordon Growth model to determine whether this is a fair price. The company paid
a dividend of $3.00 last year on earnings of $4.50 a share. If the required rate of return is
11.00% and the expected grown rate in earnings and in dividends is 5%, the current market
price is most likely:

A) undervalued.
B) correctly valued.
C) overvalued.

Question #47 of 131 Question ID: 1472858

In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned
to increase its dividend at an annual rate of 13% for the foreseeable future. Analyst Clinton
Spears has an annual return target of 15.5% for Smith Brothers stock. He decides to use the
dividend-growth rate to back out another return estimate to test against his. Smith Brothers
stock trades for $55 per share and earned $3.01 per share over the last 12 months. The
company paid a dividend of $2.15 per share during the 12-month period, and its dividend-
growth rate for the last five years was 9.2%.

Using the Gordon Growth model, the required annual return for Smith Brothers stock is
closest to:

A) 13.47%.
B) 17.42%.
C) 19.18%.

Question #48 of 131 Question ID: 1472903

Recent surveys of analysts report long-term earnings growth estimates as 5.5% and a
forecasted dividend yield of 2.0% on the market index. At the time of the survey, the 20-year
U.S. government bond yielded 4.8%. According to the Gordon growth model, what is the
equity risk premium?

A) 0.4%.
B) 7.5%.
C) 2.7%.

Question #49 of 131 Question ID: 1472873

Which of the following dividend discount models assumes a high growth rate with a linear
decline to a lower stable growth rate?

A) H model.
B) Three-stage dividend discount model.
C) Gordon growth model.
Question #50 of 131 Question ID: 1472854

Which of the following dividend discount models (DDMs) is most appropriate for modeling a
mature company?

A) Two-stage DDM.
B) H-model.
C) Gordon growth model.

Question #51 of 131 Question ID: 1472914

If the expected return on the equity market is 10% and the risk-free rate is 3%, the required
return on an asset with beta of 0.6 is closest to:

A) 6.0%.
B) 7.2%.
C) 9.0%.

Question #52 of 131 Question ID: 1472920

Dynamite, Inc., has current earnings of $26, current dividend of $2, and a returned on equity
of 18%. What is its sustainable growth?

A) 13.37%.
B) 14.99%.
C) 16.62%.

Question #53 of 131 Question ID: 1472917

A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely.
If current value of the firm's shares is $35.00, what is the required return applicable to the
investment based on the Gordon dividend discount model (DDM)?
A) 8.00%.
B) 7.86%.
C) 8.25%.

Question #54 of 131 Question ID: 1472874

The three-stage dividend discount model (DDM) allows for an initial period of:

high growth, a transitional period of declining growth and a final stable growth
A)
phase.
stable growth, a transitional period of high growth and a final declining growth
B)
phase.
high growth, a transitional period of stable growth and a final declining growth
C)
phase.

Question #55 of 131 Question ID: 1472816

The volatility of equity returns requires us to use data from long time periods to compute
mean returns. One problem that this causes is that:

A) equity premiums vary over time with perceived risk.

B) inflation alters the value of the past returns.
C) the past is rarely an indication of the future.

Question #56 of 131 Question ID: 1472885

An analyst has forecast that Apex Company, which currently pays a dividend of $6.00, will
continue to grow at 8% for the next two years and then at a rate of 5% thereafter. If the
required return is 10%, based on a two-stage model what is the current value of Apex
shares?

A) $133.13.
B) $127.78.
C) $126.24.

Question #57 of 131 Question ID: 1472815

The H-model is more flexible than the two-stage dividend discount model (DDM) because:

A) terminal value is not sensitive to the estimates of growth rates.

B) initial high growth rate declines linearly to the level of stable growth rate.
C) payout ratio changes to adjust the changes in growth estimates.

Question #58 of 131 Question ID: 1472883

An analyst for a small European investment bank is interested in valuing stocks by

calculating the present value of its future dividends. He has compiled the following financial
data for Ski, Inc.:

Earnings per Share (EPS)

Year 0 $4.00

Year 1 $6.00

Year 2 $9.00

Year 3 $13.50

Note: Shareholders of Ski, Inc., require a 20% return on their investment in the high growth
stage compared to 12% in the stable growth stage. The dividend payout ratio of Ski, Inc., is
expected to be 40% for the next three years. After year 3, the dividend payout ratio is
expected to increase to 80% and the expected earnings growth will be 2%. Using the
information contained in the table, what is the value of Ski, Inc.'s, stock?

A) $71.38.
B) $43.04.
C) $39.50.
Question #59 of 131 Question ID: 1472927

Heather Callaway, CFA, is concerned about the accuracy of her valuation of Crimson Gate, a
fast-growing telecommunications-equipment company that her firm rates as a top buy.
Crimson currently trades at $134 per share, and Callaway has put together the following
information about the stock:

Most recent dividend per share $0.55

Growth rate, next 2 years 30%

Growth rate, after 2 years 12%

Trailing P/E 25.6

Financial leverage 3.4

Sales $1198 per share

Asset turnover 11.2

Estimated market rate of return 13.2%

Callaway's employer, Bates Investments, likes to use a company's sustainable growth rate as
a key input to obtaining the required rate of return for the company's stock.

Crimson's sustainable growth rate is closest to:

A) 14.8%.
B) 13.2%.
C) 16.6%.

Question #60 of 131 Question ID: 1472813

Which of the following dividend discount models has the limitation that a sudden decrease
to the lower growth rate in the second stage may NOT be realistic?

A) Gordon growth model.

B) H model.
C) Two-stage dividend discount model.
Question #61 of 131 Question ID: 1472931

In the five-part DuPont model ROE = (NI/EBT)(EBT/EBIT)(EBIT/sales)(sales/assets)

(assets/equity), the product of the first three terms is:

A) operating profit margin.

B) gross profit margin.
C) net profit margin.

Julie Davidson, CFA, has recently been hired by a well-respected hedge fund manager in New
York as an investment analyst. Davidson's responsibilities in her new position include
presenting investment recommendations to her supervisor, who is a principal in the firm.
Davidson's previous position was as a junior analyst at a regional money management firm.
In order to prepare for her new position, her supervisor has asked Davidson to spend the
next week evaluating the fund's investment policy and current portfolio holdings. At the end
of the week, she is to make at least one new investment recommendation based upon her
evaluation of the fund's current portfolio. Upon examination of the fund's holdings,
Davidson determines that the domestic growth stock sector is currently underrepresented in
the portfolio. The fund has stated to its investors that it will aggressively pursue
opportunities in this sector, but due to recent profit-taking, the portfolio needs some
rebalancing to increase its exposure to this sector. She decides to search for a suitable stock
in the pharmaceuticals industry, which, she believes, may be able to provide an above
average return for the hedge fund while maintaining the fund's stated risk tolerance
parameters.

Davidson has narrowed her search down to two companies, and is comparing them to
determine which is the more appropriate recommendation. One of the prospects is Samson
Corporation, a mid-sized pharmaceuticals corporation that, through a series of acquisitions
over the past five years, has captured a large segment of the flu vaccine market. Samson
financed the acquisitions largely through the issuance of corporate debt. The company's
stock had performed steadily for many years until the acquisitions, at which point both
earnings and dividends accelerated rapidly. Davidson wants to determine what impact any
additional acquisitions will have on Samson's future earnings potential and stock
performance.

The other prospect is Wellborn Products, a manufacturer of a variety of over-the-counter

pediatric products. Wellborn is a relatively new player in this segment of the market, but
industry insiders have confidence in the proven track record of the company's upper
management who came from another firm that is a major participant in the industry. The
market cap of Wellborn is much smaller than Samson's, and the company differs from
Samson because it has grown internally rather than through the acquisition of its
competitors. Wellborn currently has no long-term debt outstanding. While the firm does not
pay a dividend, it has recently declared that it intends to begin paying one at the end of the
current calendar year.

Select financial information (year-end 2005) for Samson and Wellborn is outlined below:

Samson:

Current Price: $36.00

Sales: $75,000,000

Net Income: $5,700,000

Assets: $135,000,000

Liabilities: $95,000,000

Equity: $60,000,000

Wellborn:

Current Price: $21.25

Dividends expected to be received at the end of 2006: $1.25

Dividends expected to be received at the end of 2007: $1.45

Price expected at year-end 2007: $27.50

Required return on equity: 9.50%

Risk-free rate: 3.75%

Other financial information:

One-year forecasted dividend yield on market index: 1.75%

Consensus long-term earnings growth rate: 5.25%

Short-term government bill rate: 3.75%

Medium-term government note rate: 4.00%

Long-term government bond rate: 4.25%

It is the beginning of 2006, and Davidson wants use the above data to identify which will
have the greatest expected returns. She must determine which valuation model(s) is most
appropriate for these two securities. Also, Davidson must forecast sustainable growth rates
for each of the companies to assess whether or not they would fit within the fund's
investment parameters.

Question #62 - 65 of 131 Question ID: 1472820

Using the Gordon growth model (GGM), what is the equity risk premium?

A) 2.75%.
B) 3.25%.
C) 5.50%.

Question #63 - 65 of 131 Question ID: 1472821

Davidson needs to determine if the shares of Wellborn are currently undervalued or

overvalued in the market relative to the shares' fundamental value. The estimated fair value
of Wellborn shares, using a two-period dividend discount model (DDM), is:

A) $27.69.
B) $27.58.
C) $25.29.

Question #64 - 65 of 131 Question ID: 1472822

As a part of her analysis, Davidson needs to calculate return on equity for both potential
investments. What is last year's return on equity (ROE) for Samson shares?

A) 6.5%.
B) 3.5%.
C) 9.5%.

Question #65 - 65 of 131 Question ID: 1472823

Davidson determines that over the past three years, Samson has maintained an average net
profit margin of 8 percent, a total asset turnover of 1.6, and a leverage ratio (equity
multiplier) of 1.39. Assuming Samson continues to distribute 35 percent of its earnings as
dividends, Samson's estimated sustainable growth rate (SGR) is:

A) 6.2%.
B) 17.8%.
C) 11.6%.

Question #66 of 131 Question ID: 1472929

Supergro has current dividends of $1, current earnings of $3, and a sustainable growth rate
of 10%. What is Supergro's return on equity?

A) 20%.
B) 12%.
C) 15%.

Question #67 of 131 Question ID: 1472859

Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market
price is $35 and required return is 10%. Assuming the shares are properly priced, the
present value of growth opportunities is closest to:

A) +$5.00.
B) +$3.50.
C) -$5.00.

Jakzach Corp. is a U.S.-based company. Exhibits 1–3 present the financial statements, which
are prepared according to U.S. GAAP, and related information for the company. Exhibit 4
presents relevant industry and market data.

Exhibit 1
 Jakzach Corp.

Summary Balance Sheets on 31 December (U.S. $ millions)

20x6 20x5

Cash $13.00 $5.87

Accounts receivable 30.00 27.00

Inventory 209.06 189.06

Current assets $252.06 $221.93

Gross fixed assets 474.47 409.47

Accumulated depreciation (154.17) (90.00)

Net fixed assets 320.30 319.47

Total assets $572.36 $541.40

Accounts payable 25.05 $26.05

Notes payable 0.00 0.00

Current portion of long-term debt 0.00 0.00

Current liabilities $25.05 $26.05

Long-term debt 240.00 245.00

Total liabilities $265.05 $271.05

Common stock 160.00 150.00

Retained earnings 147.31 120.35

Total shareholders' equity $307.31 $270.35

Total liabilities and shareholders' equity $572.36 $541.40

Exhibit 2

Jakzach Corp.

Summary Income Statement for the Year Ended 31 December 20x6

(U.S. $ millions)

Revenue $300.80

Total operating expenses (173.74)

Operating profit 127.06

Gain on sale 4.00

Earnings before interest, taxes, depreciation, and 131.06

amortization (EDITDA)
(71.17)
Depreciation and amortization

Earnings before interest and taxes (EBIT) 59.89

Interest (16.80)

Income tax expense (12.93)

Net income 30.16

Exhibit 3

Jakzach Corp.

Common Equity Data for 20x6

Dividends paid (U.S. $ millions) $3.20

Weighted average shares outstanding during 20x6 16,000,000

Dividend per share $0.20

Earnings per share $1.89

Beta 1.80

Note: The dividend payout ratio is expected to be constant.

Exhibit 4

Industry and Market Data

31 December 20x6

Risk-free rate of return 4.00%

Expected rate of return on market index 9.00%

Median industry price/earnings (P/E) ratio 19.90

Expected industry earnings growth rate 12.00%

The portfolio manager of a large mutual fund comments to one of the fund's analysts,
Katrina Preedy:

"We have been considering the purchase of Jakzach Corp. equity shares, so I would like you
to analyze the value of the company. To begin based on Jakzach's past performance; you can
assume that the company will grow at the same rate as the industry."
Question #68 - 71 of 131 Question ID: 1472934

Calculate the value of a share of Jakzach equity on 31 December 20x6, using the Gordon
growth dividend model and the capital asset pricing model.

A) $20.00.
B) $22.40.
C) $211.68.

Question #69 - 71 of 131 Question ID: 1472935

Calculate the profit margin component of Jakzach's return on equity for the year 20x6.

A) 8.70%.
B) 10.03%.
C) 19.91%.

Question #70 - 71 of 131 Question ID: 1472936

Calculate the asset turnover component of Jakzach's return on equity for the year 20x6.
Note: Your calculations should use 20x6 beginning-of-year balance sheet values.

A) 0.53.
B) 0.56.
C) 0.94.

Question #71 - 71 of 131 Question ID: 1472937

Calculate the sustainable growth rate of Jakzach on 31 December 20x6. Note: Your
calculations should use 20x6 beginning-of-year balance sheet values.

A) 1%.
B) 9%.
C) 10%.

Question #72 of 131 Question ID: 1472809

Free cash flow to equity models (FCFE) are most appropriate when estimating the value of
the firm:

A) to equity holders.
B) to creditors of the firm.
C) only for non-dividend paying firms.

UC Inc. is a high-tech company that currently pays a dividend of $2.00 per share. UC's
expected growth rate is 5%. The risk-free rate is 3% and market return is 9%.

Question #73 - 78 of 131 Question ID: 1472839

What is the beta implied by a market price of $40.38?

A) 1.16.
B) 1.02.
C) 1.20.

Question #74 - 78 of 131 Question ID: 1472840

Based on CAPM and the Gordon growth model, what is the value of the UC stock if the firm's
retention ratio is 0.7, its tax rate is 40%, and its beta is 1.12?

A) $44.49.
B) $9.72.
C) $20.79.
Question #75 - 78 of 131 Question ID: 1472841

Assuming a beta of 1.12, if UC is expected to have a growth rate of 10% for the first 3 years
and 5% thereafter, what is the value of UC stock?

A) $53.81.
B) $50.87.
C) $46.89.

Question #76 - 78 of 131 Question ID: 1472842

Assuming a beta of 1.12, if UC's growth rate is 10% initially and is expected to decline
steadily to a stable rate of 5% over the next three years, what is the price of UC stock?

A) $47.67.
B) $46.61.
C) $47.82.

Question #77 - 78 of 131 Question ID: 1472843

The discounted dividend approach that we have used to value UC Inc. is most appropriate
for valuing dividend-paying stocks in which:

A) the investor takes a minority ownership perspective.

B) free cash flow is negative.
C) dividends differ substantially from FCFE.

Question #78 - 78 of 131 Question ID: 1472844

UC Inc. had earnings of $3.00/share last year and a justified trailing P/E of 15.0. Is the stock
currently overvalued, undervalued, or fairly valued if we consider a security trading within a
band of ±10 percent of intrinsic value to be within a "fair value range"? At a market price of
$40.38, UC Inc. is best described as:
A) overvalued.
B) undervalued.
C) fairly valued.

Question #79 of 131 Question ID: 1472916

Given that a firm's current dividend is $2.00, the forecasted growth is 7%, declining over
three years to a stable 5% thereafter, and the current value of the firm's shares is $45, what
is the required rate of return?

A) 7.8%.
B) 10.5%.
C) 9.8%.

Question #80 of 131 Question ID: 1472902

Which of the following actions will be least helpful for an analyst attempting to improve the
predictive power of his scenario analysis?

A) Using a spreadsheet rather than a calculator.

B) Limiting deviations from the core model.
C) Acquiring more precise inputs.

Question #81 of 131 Question ID: 1472824

Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at
20% for two years and then at 4% thereafter. If the required return for Deployment
Specialists is 8.5%, the current value of Deployment Specialists is closest to:

A) $25.39.
B) $30.60.
C) $33.28.
Question #82 of 131 Question ID: 1472915

Given an equity risk premium of 3.5%, a forecasted dividend yield of 2.5% on the market
index and a U.S. government bond yield of 4.5%, what is the consensus long-term earnings
growth estimate?

A) 8.0%.
B) 5.5%.
C) 10.5%.

Question #83 of 131 Question ID: 1472855

Which of the following would NOT be appropriate to value a firm with two expected growth
stages? A(an):

A) H-model.
B) free cash flow model.
C) Gordon growth model.

Question #84 of 131 Question ID: 1472834

A company reports January 1, 2002, retained earnings of $8,000,000, December 31, 2002,
retained earnings of $10,000,000, and 2002 net income of $5,000,000. The company has
1,000,000 shares outstanding and dividends are expected to grow at a rate of 5% per year.
What is the expected dividend at the end of 2003?

A) $3.15.
B) $3.00.
C) $13.65.

Question #85 of 131 Question ID: 1472907

Which of the following groups of statistics provides enough data to calculate an implied
return for a stock using the two-stage DDM?

A) Yield, stock price, historical dividend-growth rate, historical profit-growth rate.

B) P/E ratio, trailing 12-month profits, short-term PEG ratio, long-term PEG ratio, yield.
C) Short-term growth rate, long-term growth rate, stock price, trailing 12-month profits.

Question #86 of 131 Question ID: 1472870

Most firms follow a pattern of growth that includes several stages. The second stage is most
likely to be referred to as the:

A) decline stage.
B) maturity stage.
C) transitional stage.

Question #87 of 131 Question ID: 1472918

Which of the following is least likely a valid approach to determining the appropriate
discount rate for a firm's dividends?

A) Free cash flow to firm (FCFF).

B) Arbitrage pricing theory (APT).
C) Capital asset pricing model (CAPM).

Question #88 of 131 Question ID: 1472853

If the growth rate in dividends is too high, it should be replaced with:

A) the growth rate in earnings per share.

B) a growth rate closer to that of gross domestic product (GDP).
C) the average growth rate of the industry.
Question #89 of 131 Question ID: 1472908

If the risk-free rate is 6%, the equity premium of the chosen index is 4%, and the asset's beta
is 0.8, what is the discount rate to be used in applying the dividend discount model?

A) 10.80%.
B) 7.80%.
C) 9.20%.

Question #90 of 131 Question ID: 1472829

JAD just paid a dividend of $0.80. Analysts expect dividends to grow at 25% in the next two
years, 15% in years three and four, and 8% for year five and after. The market required rate
of return is 10%, and Treasury bills are yielding 4%. JAD has a beta of 1.4. The estimated
current price of JAD is closest to:

A) $45.91.
B) $29.34.
C) $25.42.

Question #91 of 131 Question ID: 1472879

Methods for estimating the terminal value in a DDM are least likely to include:

A) the Gordon Growth Model.

B) PVGO.
C) the market multiple approach.

Question #92 of 131 Question ID: 1472831

A firm currently has earnings of $3.14, and pays a dividend of $1.00, which is expected to
grow at a rate of 10%. If the required return is 15%, what is the current value of the shares
using the Gordon growth model?

A) $38.98.
B) $69.08.
C) $22.00.

Question #93 of 131 Question ID: 1472928

Demonstrate the use of the DuPont analysis of return on equity in conjunction with the
sustainable growth rate expression.

The following statistics are selected from Kyle Star Partners (Kyle) financial statements:

Sales $100 million

Net Income $15 million

Dividends $5 million

Total Assets $150 million

Total Equity $50 million

What is Kyle's sustainable growth rate?

A) 24.5%.
B) 33.3%.
C) 20.0%.

Question #94 of 131 Question ID: 1472888

James Malone, CFA, covers GNTX stock, which is currently trading at $45.00 and just paid a
dividend of $1.40. Malone expects the dividend growth rate to decline linearly over the next
six years from 25% in the short run to 6% in the long run. Malone estimates the required
return on GNTX to be 13%. Using the H-model, the value of GNTX is closest to:

A) $32.60.
B) $33.40.
C) $17.55.

Question #95 of 131 Question ID: 1472875

What is the difference between a standard two-stage growth model and the H-model?

The H-model assumes that earnings will dip in the middle of each stage and return
A)
to the previous rate by the period's end.
The H-model assumes a terminal value, while the standard two-stage model does
B)
not.
In the standard two-stage model, a fixed rate of growth is assumed for each stage,
C)
while the H-model assumes a linearly declining rate of growth in one stage.

Question #96 of 131 Question ID: 1472881

Q-Partners is expected to have earnings in ten years of $12 per share, a dividend payout
ratio of 50%, and a required return of 11%. At that time, ROE is expected to fall to 8% in
perpetuity and the trailing P/E ratio is forecasted to be eight times earnings. The terminal
value at the end of ten years using the P/E multiple approach and DDM is closest to:

P/E multiple DDM

A) 96.32 85.71

B) 96.32 85.14

C) 96.00 89.14

Question #97 of 131 Question ID: 1472856

Analyst Louise Dorgan has put together a short fact sheet on two companies, Benson
Orchards and Terra Firma Development.

Benson Orchards Terra Firma Development

Price/earnings ratio 18.5

Most recent dividend $0.56 per share $1.67 per share

Estimated stock return 15%

Estimated market return 13%

Beta 1.2 1.7

Trailing profits $5.16 per share

Stock-market value $123 million $1.678 billion

Shares outstanding 875 million

The risk-free rate is 3.6%, and Dorgan estimates the stock market's equity risk premium as
7.5%.

Using only the data presented above, can Dorgan create a Gordon Growth model for:

Benson Terra Firm

Orchards Development

A) Yes Yes

B) No No

C) Yes No

Question #98 of 131 Question ID: 1472814

Which of the following is least likely a potential problem associated with the three-stage
dividend discount model (DDM)? The:

A) beta in the stable period is too high, resulting in an extremely low stock value.
high-growth and transitional periods are too long, resulting in an extremely high
B)
stock value.
C) stable period payout ratio may be too high resulting in an extremely low value.
Question #99 of 131 Question ID: 1472911

An investor buys shares of a firm at $10.00. A year later she receives a dividend of $0.96 and
sells the shares at $9.00. What is her holding period return on this investment?

A) -0.8%.
B) -0.4%.
C) +1.2%.

Question #100 of 131 Question ID: 1472828

An investor projects that a firm will pay a dividend of $1.25 next year, $1.35 the second year,
and $1.45 the third year. At the end of the third year, she expects the asset to be priced at
$36.50. If the required return is 12%, what is the current value of the shares?

A) $29.21.
B) $32.78.
C) $31.16.

Question #101 of 131 Question ID: 1472930

If Cantel, Inc., has current earnings of $17, dividends of $3.50, and a sustainable growth rate
of 11%, what is its return on equity (ROE)?

A) 13.85%.
B) 17.64%.
C) 11.91%.

Question #102 of 131 Question ID: 1472830

IAM, Inc. has a current stock price of $40.00 and expects to pay a dividend in one year of
$1.80. The dividend is expected to grow at a constant rate of 6% annually. IAM has a beta of
0.95, the market is expected to return 11%, and the risk-free rate of interest is 4%. The
expected stock price two years from today is closest to:

A) $41.03.
B) $43.49.
C) $43.94.

Question #103 of 131 Question ID: 1472871

In what stage of growth would a firm most likely NOT pay dividends?

A) Initial growth stage.

B) Transition stage.
C) Declining stage.

Question #104 of 131 Question ID: 1472818

Multi-stage dividend discount models can be used to estimate the value of shares:

A) only when the growth rate exceeds the required rate of return.
B) only under a limited number of scenarios.
C) under an almost infinite variety of scenarios.

Question #105 of 131 Question ID: 1480253

The debate over whether to use the arithmetic mean or geometric mean of market returns
for the capital asset pricing model (CAPM):

A) was settled by the work of Harry Markowitz in 1972.

B) has little practical effect because they are both very close.
C) limits its usefulness in estimating the required return of an asset.
Question #106 of 131 Question ID: 1472894

Given that a firm's current dividend is $2.00, the forecasted growth is 7% for the next two
years and 5% thereafter, and the current value of the firm's shares is $54.50, what is the
required rate of return?

A) 10%.
B) 9%.
C) Can’t be determined.

Question #107 of 131 Question ID: 1472866

Stan Bellton, CFA, is preparing a report on TWR, Inc. Bellton's supervisor has requested that
Bellton include a justified trailing price-to-earnings (P/E) ratio based on the following
information:

Current earnings per share (EPS) = $3.50.

Dividend Payout Ratio = 0.60.

Required return for TRW = 0.15.

Expected constant growth rate for dividends = 0.05.

TWR's justified trailing P/E ratio is closest to:

A) 6.3.
B) 6.0.
C) 4.0.

Question #108 of 131 Question ID: 1472847

What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend
rate of 7.0% and a required return of 9.0%?

A) $71.
B) $56.
C) $78.

Question #109 of 131 Question ID: 1472939

The current market price per share for Burton, Inc. is $33.33, and an analyst is using the
Gordon Growth model to determine whether this is a fair price. The company paid a
dividend of $2.00 last year on earnings of $2.50 a share. If the required rate of return is
12.00% and the expected grown rate in earnings and in dividends is 6%, the current market
price is most likely:

A) undervalued.
B) correctly valued.
C) overvalued.

Question #110 of 131 Question ID: 1472805

Multi-stage growth models can become computationally intensive. For this reason they are
often referred to as:

A) quadratic models.
B) R-squared models.
C) spreadsheet models.

Question #111 of 131 Question ID: 1472925

In computing the sustainable growth rate of a firm, the earnings retention rate is equal to:

A) 1 − (dividends / earnings).
B) 1 − (dividends / assets).
C) Dividends / required rate of return.
Question #112 of 131 Question ID: 1472836

Jand, Inc., currently pays a dividend of $1.22, which is expected to grow at 5%. If the current
value of Jand's shares based on the Gordon model is $32.03, what is the required rate of
return?

A) 9%.
B) 7%.
C) 8%.

Question #113 of 131 Question ID: 1472919

Which of the following is NOT a component of the sustainable growth rate formula using the
DuPont model?

A) Earnings retention ratio.

B) EBIT/interest expense.
C) Net income/sales.

Question #114 of 131 Question ID: 1472861

Ambiance Company has a current market price of $42, a current dividend of $1.25 and a
required rate of return of 12%. All earnings are paid out as dividends. What is the present
value of Ambiance's growth opportunities (PVGO)?

A) $38.85.
B) $16.71.
C) $31.58.

Question #115 of 131 Question ID: 1472878

The most appropriate model for analyzing a profitable high-tech firm is the:
A) three-stage dividend discount model (DDM).
B) zero growth cash flow model.
C) H-model.

Bernadine Nutting has just completed several rounds of job interviews with the valuation
group, Ancis Associates. The final hurdle before the firm makes her an offer is an interview
with Greg Ancis, CFA, the founder and senior partner of the group. He takes pride in
interviewing all potential associates himself once they have made it through the earlier
rounds of interviews, and puts candidates through a grueling series of tests. As soon as
Nutting enters his office, Ancis tries to overwhelm her with financial information on a variety
of firms, including Turbo Financial Services, Aultman Construction, and Reality Productions.

Ancis then moves on to Turbo Financial Services. Ancis has been following Turbo for quite
some time because of its impressive earnings growth. Earnings per share have grown at a
compound annual rate of 19% over the past six years, pushing earnings to $10 per share in
the year just ended. He considers this growth rate very high for a firm with a cost of equity
of 14%, and a weighted average cost of capital (WACC) of only 9%. He's especially impressed
that the firm can achieve these growth rates while still maintaining a constant dividend
payout ratio of 40%, which he expects the firm to continue indefinitely. With a market value
of $55.18 per share, Ancis considers Turbo a strong buy.

Ancis believes that Turbo will have one more year of strong earnings growth, with EPS rising
by 20% in the coming year. He then expects EPS growth to fall 5 percentage points per year
for each of the following two years, and achieve its long-term sustainable growth rate of 5%
beginning in year four.

Finally, Ancis turns to Aultman Construction, trading at $22 per share (with current EPS of
$2.50 and a required return of 18%), and Reality Productions, which currently trades at $30
per share. Reality Production's current dividend is $1.50, but the historical dividend growth
rate has been a stable 10%. Dividend growth is expected to decline linearly over six years to
5%, and then remain at 5% indefinitely.

Question #116 - 119 of 131 Question ID: 1472890

Which of the following statements is least accurate? The two-stage DDM is most suited for
analyzing firms that:

A) are in an industry with low barriers to entry.

B) are expected to grow at a normalized rate after a fixed period of time.
C) own patents for a very profitable product.

Question #117 - 119 of 131 Question ID: 1472891

What is the implied required rate of return for Reality Productions?

A) 12.50%.
B) 11.00%.
C) 11.75%.

Question #118 - 119 of 131 Question ID: 1472892

Based upon its current market value, what is the implied long-term sustainable growth rate
of Turbo Financial Advisors?

A) 4.0%.
B) 0.3%.
C) 19.0%.

Question #119 - 119 of 131 Question ID: 1472893

What is the present value of Aultman's future investment opportunities as a percentage of

the market price?

A) 13.9%.
B) 8.1%.
C) 36.9%.

Question #120 of 131 Question ID: 1472811

The H model will NOT be very useful when:

A) a firm has a constant payout policy.

B) a firm is growing rapidly.
C) a firm has low or no dividends currently.

Question #121 of 131 Question ID: 1472912

An investor computes the current value of a firm's shares to be $34.34, based on an

expected dividend of $2.80 in one year and an expected price of the share in one year to be
$36.00. What is the investor's required rate of return on this investment?

A) 11%.
B) 13%.
C) 10%.

Question #122 of 131 Question ID: 1472845

What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend
rate of 11.0% and a required return of 7.5%?

A) $138.
B) $152.
C) $147.

Question #123 of 131 Question ID: 1472812

One of the limitations of the dividend discount models (DDMs) is that they:

A) are very sensitive to growth and required return assumptions.

B) are conceptually difficult.
C) can only be used for companies that are experiencing stable growth
Question #124 of 131 Question ID: 1472913

An investor projects the price of a stock to be $16.00 in one year and expected the stock to
pay a dividend at that time of $2.00. If the required rate of return on the shares is 11%, what
is the current value of the shares?

A) $15.28.
B) $14.11.
C) $16.22.

Question #125 of 131 Question ID: 1472835

A firm's dividend per share in the most recent year is $4 and is expected to grow at 6% per
year forever. If its shareholders require a return of 14%, the value of the firm's stock (per
share) using the single-stage dividend discount model (DDM) is:

A) $53.00.
B) $28.57.
C) $50.00.

Question #126 of 131 Question ID: 1472864

A firm has the following characteristics:

Current share price $100.00.

Current earnings $3.50.
Current dividend $0.75.
Growth rate 11%.
Required return 13%.

Based on this information and the Gordon growth model, what is the firm's justified trailing
price to earnings (P/E) ratio?

A) 8.9.
B) 11.3.
C) 11.9.

Question #127 of 131 Question ID: 1472938

In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned
to increase its dividend at an annual rate of 5% for the foreseeable future. Analyst Anton
Spears is using a required return of 9.5% for Smith Brothers stock. Smith Brothers stock
trades for $52.17 per share and earned $3.01 per share over the last 12 months. The
company paid a dividend of $2.15 per share during the last 12-month period, and its
dividend-growth rate for the last five years was 9.2%. Using the Gordon Growth model, the
share price for Smith Brothers stock is most likely:

A) correctly valued.
B) overvalued.
C) undervalued.

Question #128 of 131 Question ID: 1472926

Supergro has current dividends of $1, current earnings of $3, and a return on equity of 16%,
what is its sustainable growth rate?

A) 12.2%.
B) 10.7%.
C) 8.9%.

Question #129 of 131 Question ID: 1472827

An investor projects that a firm will pay a dividend of $1.00 next year and $1.20 the following
year. At the end of the second year, the expected price of the shares is $22.00. If the
required return is 14%, what is the current value of the firm's shares?

A) $19.34.
B) $15.65.
C) $18.73.

Question #130 of 131 Question ID: 1472904

CAB Inc. just paid a current dividend of $3.00, the forecasted growth is 9%, declining over
four years to a stable 6% thereafter, and the current value of the firm's shares is $50, what is
the required rate of return?

A) 10.5%.
B) 12.7%.
C) 9.8%.

Question #131 of 131 Question ID: 1472810

If the three-stage dividend discount model (DDM) results in extremely high value, the:

growth rate in the stable growth period is lower than that of gross national product
A)
(GNP).
B) transition period is too short.
C) growth rate in the stable growth period is probably too high.