Capital Budgeting Essay

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FIN500 Assignment 3 (individual work) Total points: 12 Part I. Multiple choice questions/problems: 1. Other things equal, when residual cash flows are low, stock values will be B. low. 2. Investors buy stock at the C. quoted ask price. 3. Which of the following statements is most correct? A. The stock valuation model, P0 = D1/ (i - g), can be used for firms which have negative growth rates. 4. Company J and Company K each recently reported the same earnings per share (EPS). Company J’s stock, however, trades at a higher price. Which of the following statements is most correct? A. Company J must have a higher P/E ratio. 5. Value a Constant Growth Stock Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.49. What is the value of their stock when the required rate of return is 14.13 percent? D. $49.00 P0 = D0(1+g)/(i-g) = .49(1+.13)/(.1413-.13) = 49.00 6. P/E Ratio Model and Future Price Walmart (WMT) recently earned a profit of $3.13 per share and has a P/E ratio of 14.22. The dividend has been growing at a 12.5 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? C. $80.20 Pn = (P/e) * E0 * (1+g)n P5 = (14.22) * 3.13 * (1+.125)5 = 80.2059 7. Expected Return The Buckle (BKE) recently paid a $0.90 dividend. The dividend is expected to grow at a 19 percent rate. At the current stock price of $43.17, what is the return shareholders are expecting? C. 21.48% i = D1/P0 + g = D0(1 + g)/P0 + g = .90(1+.19)/43.17 + .19 = .2148 8. This is the interest rate that would exist on a default free security if no inflation were expected. B. real interest rate 9. This theory argues that individual investors and financial

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