Pearson has just paid an annual dividend of $1 per share. Analysts are predicting a 10% per year growth rate in earnings over the next three years. After then, Pearson’s earnings are expected to grow at a rate of 5% per year forever. If Pearson’s cost of equity is 14% per year and its dividend payout ratio remains constant, what is the stock price today based on the dividend discount model? (Hint: earnings growth rate equals to dividends growth rate if payout ratio is held constant)

$12.5

$13.3

$14.2

$15.6

A stock paying $3 in annual dividends sells now for $65 and has an expected return of 12%. What might investors expect to pay for the stock one year from now?

$60

$65

$70

$75

Spring Corp. just announced that it plans to cut its dividend from $3 to $2 per share and use the extra funds to expand its operations. Prior to this announcement, Spring’s dividends were expected to grow at 5% per year and Spring’s stock was trading at $40 per share. With the new expansion, Spring’s dividends are expected to grow at 8% per year indefinitely. Assuming that Spring’s risk is unchanged by the expansion, what is the value of a share of Spring after the announcement?

$30.6

$38.3

$44.4

$49.6

Meow Inc. is expected to generate free cash flows of 10 million, 15 million, 20 million and 25 million over the next four years, after which free cash flows are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 10% and Meow has cash of $50 million, debt of $60 million, and 30 million shares outstanding, what is Meow’s expected current share price?

$16.5

$17.0

$17.5

$18

Notepad Inc. is expected to generate free cash flow of 50 million at the end of this year. For the next two years, the company’s free cash flow is expected to grow at a rate of 6%. After that time, the company’s free cash flow is expected to level off to a growth rate of 3% per year. If the weighted average cost of capital is 10% and Notepad has cash of $150 million, debt of $200 million, and 200 million shares outstanding, what is Notepad’s expected current share price?

$2.3

$2.9

$3.1

$3.6

BP Oil announces that a wildcat well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase BP’s free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on BP’s stock price upon the announcement, given that BP has 80 million shares outstanding, no debt, and an equity cost of capital of 10%?

Price decreases by $3.2

Price increases by $3.2

Price increases by $6.7

No change

## Finance Please Help Explain?

November 19th, 2012 admin