Question

31.       ABC is expected to pay a dividend per share of $2.20 next year. Dividends are expected to grow by 5% forever. What is the required rate if the current stock price is $50?

A         2.11%

B         4.21%

C         5.01%

D         9.14%

E          None of the above

32        What is the fair value of a business that promises a $14,000 cash flow every year for the next 5 years, assuming a 12% required rate?

A         $50,266.87

B         $50.466.87

C         $60,666.87

D         $60,766.87

E          None of the above

33        If you purchased the above business for $60,000, then your NPV is… and you …value

A         -$1,500; destroyed

B         -$9,533.13; created

C         $666.87.13; created

D         $766.87.23; created

E          None of the above

34.       What are our firm’s operating cash flows for a single year. using the following data:

Sales: $9,000

All costs excluding depreciation: 20% of sales

Annual depreciation expense: $3,000

Tax rate: 21%

Purchase price of asset: $2,200

Net working capital needed: $1,200

A         $4,200

B         $6,200

C         $6,218

D         $6,318

E          None of the above

35.       What is our firm’s initial investment, using the above data.

A         $1,000

B         $2,200

C         $3,400

D         $6,400

E          None of the above

Answer 1

Share price = Expected Dividend/(Required return – growth rate)

50 = 2.20/(Required return – 5%)

Required return = 9.4%

i.e. E none of the above

32.Value = Present value of all future free cash flows

= 14000*PVAF(12%, 5 years)

= 14000*3.6048

= $50,467.2

i.e. B  $50,466.87 approx.

33.NPV = Value – amount paid

= 50,466.87 – 60,000

= -$9,533.13, destroyed

i.e. E none of the above

34. Operating cash flow = (Sales – Costs – Depreciation)(1-Tax rate) + Depreciation

= (9000-20%*9000-3000)(1-21%)+3000

= $6,318

i.e. D

35. Initial investment = 2200+1200

= $3400

i.e. C