Negative growth stock

Swinton Mining has seen its business slowly wind down. It recently paid a dividend of $1.80 per share, but analysts expected the dividend to decrease by 2% per year.  The risk free rate is 6.0% and the market risk premium is 5.0%.  If Swinton's beta is 0.6 and the market is in equilibrium, what is the value of its stock?

?       $11.28

?       $13.29

?       $16.04

?       $10.92

?       $12.80

What is Swinton Mining's current expected dividend yield?

?       12.00%

?       11.00%

?       13.00%

?       13.50%

?       14.50%

You would expect Swinton Mining's dividend yield to?

?       Decrease

?       Increase

?       Stay the Same

What is Swinton's expected stock price in one year?

?       $15.03

?       $12.29

?       $15.72

?       $12.76

?       $11.60

Swinton Mining is a negative growth stock its dividend is declining each year, and so is its stock price.  Would a rational investor ever consider investing in Swinton Mining?

?       Yes

?       No

2.  Non-Constant growth stock and dilution

Portman Industries just paid a dividend of $2.00 per share. Portman expects the coming year to be very good, and its dividend is expected to grow by 15% over the year.  After the next year, though, Portman's dividend is expected to grow at a constant rate of 6.1%.  The risk free rate is 6% and the market risk premium is 4%.  If Portman's beta is 1.1, what is the current intrinsic value of the firm's stock?  Assume the market is in equilibrium.

?       $52.27

?       $53.49

?       $56.10

?       $57.50

?       $54.76

Portman has 500,000 shares outstanding and Judy Davis, an investor, holds 40,000.  Suppose Portman is considering issuing 100,000 new shares at a price of $50.00 per share.  If the new shares are sold to outside investors, how much will Judy's investment in Portman be diluted on a per-share basis?

?       $0.80

?       $1.25

?       $0.38

?       $0.58

?       $1.01

3.  Corporate Value Model

Ward Pharmaceuticals is expected to generate free cash flow of $150 million this year (FCF1=$150 million), and FCF is expected to grow at a rate of 20% over the following two years (FCF2 and FCF3)  After the third year however, FCF is expected to grow at a constant rate of 5% per year, forever (FCF4).  If Ward's weighted average cost of capital (WACC) is 10.9%, what is Wards current total firm value?

?       $3,258 Million

?       $2.862 Million

?       $2,820 Million

?       $2,999 Million

?       $2,778 Million

Ward's debt has a market value of $1,800 million and Ward has no preferred stock.  If Ward has 80 million shares of common stock outstanding, what is Ward's estimated intrinsic value per share of common stock?

?       $12.22

?       $14.99

?       $12.74

?       $18.23

?       $14.40

4. Church Inc.  Is presently enjoying relatively high growth

Church Inc.  Is presently enjoying relatively high growth because of a surge in the demand for its new product, management expects earnings and dividends to row at a rate of 40% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, that is g = 0.  The company's last dividend D0= $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk free rate is 3.00%.  What is the current price of the common stock?

?       $53.97

?       $48.22

?       $47.77

?       $44.24

?       $51.31

5.  Nachman Industries just paid a dividend of D0 = $4.75.  Analysts expect the company's dividend to grow by 30% this year, by 10% in year 2, and at a constant rate of 5% in year 3 and thereafter.  The required return on this low risk stock is 9.00%.  What is the best estimate of the stock's current market value?

?       $150.15

?       $161.46

?       $175.99

?       $132.39

?       $196.98

6.  Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.50 per share.  If the required return on this preferred stock is 6.5%, at what price should the stock sell?

?       $30.00

?       $46.54

?       $38.46

?       $41.54

?       $44.23

7. Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years.  However, FCF is expected to be $60.00 million in year 5 and the FCF growth rate is expected to be a constant 6.5% beyond that point.  The weighted average cost of capital is 12.0%.  What is the horizon (or terminal) value (in millions) at t = 5?

?       $1,011

?       $1,162

?       $871

?       $1,383

?       1,301

8.  Stocks A and B have the following data

The market risk premium is 6.0% and the risk free rate is 6.4%.  Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is correct?

?       Stock A must have a higher dividend yield than Stock B

?       Stock B's dividend yield equals it's expected dividend growth rate

?       Stock B could have the higher expected return

?       Stock A must have a higher stock price than Stock B

?       Stock B must have a higher required return

9.  Which of the following statements is correct?

?       To implement the corporate valuation model, we discount net operating profit after taxes at the weighted average cost of capital

?       To implement the corporate valuation model, we discount projected free cash flows at he weighted average cost of capital

?       To implement the corporate valuation model we discount projected net income at the weighted average cost of capital

?       To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital?

?       The corporate valuation model requires the assumption of a constant growth rate in all years