Fundamental Analysis and Stock Essay

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Pages: 7

Chapter 9 The Valuation of Stock


T 1. The expected return depends on future dividends and future price appreciation.

T 2. The dividend-growth valuation model depends on dividends and the required rate of return. F 3. The dividend‑growth model includes both the current and past years' dividends.

T 4. If the anticipated return exceeds the required rate of return, the investor should buy the stock.

F 5. The dividend‑growth model requires that dividends grow annually at the same rate.

F 6. A higher beta decreases the required rate of return.

T 7. The required rate of return includes the risk‑free rate and a risk premium.

T 8. An increase in the risk‑free rate will tend to decrease
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If you want to earn 12 percent on your funds, is this a good buy?

2. If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent, what is the implied annual rate of return on the investment?

3. As an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information is Firm A B C Current dividends $1.00 $3.00 $7.50 Expected annual growth 7% 2% (‑1%) rate in dividends Current market price $23 $47 $60

a. What is the maximum price? Which (if any) should you buy?

b. If you bought Stock A, what is your implied rate of return?

c. If your required rate of return were 10 percent, what should be the price necessary to induce you to buy Stock A?

4. You know the following concerning a common stock: EPS $3.00 Payout ratio 25% P/E 10 Annual rate of growth of 6% earnings and dividends

If you want to earn 10 percent, should you buy this stock? What is the maximum price you should be willing to pay for the stock?

5. The risk‑free rate of return is 8 percent; the expected rate of return on the