Drill 3: Stock Valuation
Write TRUE if the statement is true, otherwise, write FALSE and the element that makes the statement
false.
TRUE OR FALSE
1. Suppose there are 3 vacancies on the board, an owner of 1,000 shares can place 3,000 in one director.
2. A poison pill provision allows the stockholders of a firm elect new members of the board at their
discretion.
3. Dividends to be paid out of stocks cannot be expected to be regularly paid.
4. Like any other financial assets, the value of stocks is computed as the present value of future cash
flows.
5. Future cash flows of common stock include the dividends expected in each year and the price expected
to be received when the stock is sold.
6. The estimated future dividend may differ among investors.
7. The constant growth model may be used only when the required rate of return is less than the growth
rate of the stock.
8. There is a trade-off between current dividends and expected dividends, in the sense that, companies
that pay high dividends plowback more of their earnings thereby reducing future earnings.
9. Riskier stocks have lower P/E ratio because earnings are discounted at a higher rate for such stocks.
10. If stock A has a higher P/E ratio than stock B, it simply means that stock A has lower earnings than
stock B.
Prove whether the answers indicated after every question is correct or not.
STRAIGHT PROBLEMS
11. In March 2019, you want to ascertain whether the value of Kimmel Stock is in fact its current market
price of P38.79. Given the history of Kimmel Corporation’s dividends, you believe that the company will
pay total dividends in 2019 of P1.10. Your analysis indicates that the total dividends in 2020 and 2021
will be P1.18 and P1.28, respectively. In addition, you believe that the price of Kimmel Corporation
stock at the end of 2021 will be P50.75 per share. If the quoted interest rate is 11.5%, what is the value
of Kimmel stock? Answer: P39.47
12. The dividend has grown from P1.00 per share on November 2014 to P2.80 during 2020. You think this
growth rate will continue for three years and the fall to the long-term growth rate of 9.29 percent
predicted by analysts. Suppose the required rate of return for such stock is 13%, answer the following
questions:
a. What is the growth rate from 2014 to 2020? Answer: 18.7%
b. What is the current price of the stock? Answer: P104.88
13. What is the price of Corden stock at Year 5 when currently it has a forward P/E (price-earnings) ratio of
9.46 and growth rate of 14%? The earnings per share is P8.48 and it has paid a dividend of P2.08 in
the previous last year. The analysts believe that the P/E ratio will continue to be at 9.46 until Year 5.
Answer: P154.56
14. Fallon Inc. is considering to embark on a large high-risk project. You believe that when this news is
publicly announced, shareholders will react by requiring a higher return from the company and by
expecting faster growth. Fallon Inc. is expected to pay P1.75 per share dividend next year. you think
that the current price of P70 is fair, given the expected 9 percent growth rate. However, after the
announcement investors will expect a 10 percent growth rate and increase required rate of return by
1.2 percent. If this will happen as you predict, how will the stock price of Fallon stock change? Answer:
P64.81
15. DeGeneres Co. will pay their first dividend next year at P0.20. The dividend is expected to grow at 20
percent per year for the nest 4 years. In the fifth year and afterwards, the dividends will grow at a
steady 9.5 percent. If the required rate of return is 11 percent, what is the value of the stock today?
Answer: P25.23
