Quiz 7:

1. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to
hold for one year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of
the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12%
return.
A. $31.25
B. $32.37
C. $38.47
D. $41.32

2. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is
12% and its expected EPS is $5.00. If the firm's plow-back ratio is 60%, its P/E ratio will be _________.
A. 7.14
B. 14.29
C. 16.67
D. 22.22

3. A preferred share of Coquihalla Corporation will pay a dividend of $8.00 in the upcoming year, and every
year thereafter, i.e., dividends are not expected to grow. You require a return of 7% on this stock. Using the
constant growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth
_________.
A. $13.50
B. $45.50
C. $91.00
D. $114.29

4. A firm is planning on paying its first dividend of $2 after two years. Then dividends are expected to grow at
6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?
A. $25.00
B. $16.87
C. $19.24
D. $20.99

Value at year 2 = 2/.14-.06 = 25

V0 = 25/ (1. 14)2 = $ 19.24

5. Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee
Corporation is expected to pay a dividend in year 1 of $3.00, a dividend in year 2 of $2.00, and a dividend in
year 3 of $1.00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate
required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.
A. $13.07
B. $13.58
C. $18.25
D. $18.78

1- 1- Present value of dividends paid in first stage:

3/(1.08) + 2/(1.08)2 + 1/(1.08)3 = 5.29
2- Price at the second stage:
1(1-.02) / (.08 (-.02) = 9.8
3- PV of the price : 9.8/(1.08)3 = 7.78
4- V0 = 5.29 + 7.78 = $ 13.07