1. The valuation model that computes the current value of a
stock by dividing next year's dividend by the net of the discount rate minus
the dividend growth rate is called the _____ model.
a. stock price
b. equity pricing
c. capital gain
D. dividend growth
e. current value
2. The dividend yield is defined as:
a. the current dividend divided by the current market value
per share.
b. the current dividend divided by the current book value
per share.
C. next year's expected dividend divided by the current
market value per share.
d. next year's expected dividend divided by the current book
value per share.
e. next year's expected dividend divided by next year's
expected market value per share.
3. The dividend growth rate is referred to as the:
A. capital gains yield.
b. discount rate.
c. market rate.
d. dividend yield.
e. total return.
4. Ted's Tools expects to commence paying an annual dividend
two years from now. The first dividend is expected to be $.75 per share with all dividends thereafter
increasing by 2 percent annually. What is the expected dividend in year 5?
A. $.75 (1.02)3
b. $.75 (1.02)4
c. $.75 (1.02)5
d. $.75 (1.02)6
e. $.75 (1.02)7
5. Presto's just paid an annual dividend of $1.25 per share.
The firm has a policy whereby it increases its dividend by 2 percent annually. Which one of the following
is the correct computation for the capital gains yield if the current stock price is $21 a share?
a. (.02 $1.25) / $21
b. $1.25 / $21
C. .02
d. .02 / $21
e. [$1.25 (1 + .02)] / $21
6. The common stock of the Paper & Printing Co. is
selling for $22 a share and has a dividend yield of 4.5 percent. What is the dividend amount?
a. $.49
b. $.67
C. $.99
d. $2.05
e. $2.22
Dividend = .045 × $22 = $.99
7. Scenic Images paid an annual dividend of $1.85 per share
last year. Management just announced that future
dividends will increase by 3 percent annually. What is the
amount of the expected dividend in year 4?
a. $1.91
b. $1.96
c. $2.02
D. $2.08
e. $2.14
D4 = $1.85 × (1.03)4 = $2.08
8. The Flower & Gift Co. pays a constant annual dividend
of $1.74 a share and currently sells for $15.00 a share. What is the rate of return?
a. 3.87 percent
b. 4.64 percent
c. 5.80 percent
d. 10.40 percent
E. 11.60 percent
R = $1.74 / $15.00 = .1160 = 11.60 percent
9. Boots Roofing just paid its annual dividend of $.90 a
share. The firm recently announced that all future dividends will be increased by 3.5 percent annually. What is
one share of this stock worth to you if you require a 12 percent rate of return?
a. $10.30
b. $10.35
c. $10.59
d. $10.78
E. $10.96
P0 = ($.90 × 1.035) / (.12 − .035) = $10.96
10. Northwest, Inc. stock is selling for $40.59 a share
based on a 10 percent rate of return. What is the amount
of the next annual dividend if the dividends are increasing
by 2 percent annually?
a. $3.18
B. $3.25
c. $3.31
d. $3.38
e. $3.45
D $3.25
D $3.2472
D $40.59 .08
.10 .02
D
$40.59
1
1
1
1
11. Locksmith's is expected to pay an annual dividend of
$.75 this month. The stock is selling for $10.90 a share
and has a required return of 11 percent. What is the growth
rate of the dividend?
a. 3.62 percent
b. 3.85 percent
c. 3.94 percent
D. 4.12 percent
e. 4.27 percent
g 4.12percent
g .04119
$.449 $10.90g
$1.199 $10.90g $.75
.11 g
$.75 $10.90
12. SRS, Inc. just paid an annual dividend of $1.20 last
month. The required return is 15 percent and the growth
rate is 3 percent. What is the expected value of this stock
ten years from now?
a. $12.00
b. $12.83
c. $13.05
d. $13.44
E. $13.84
P10 = [$1.20 × (1 + .03)11+ / (.15 − .03) = $13.84
13. The Farming Equipment Manufacturing Co. has not kept
pace with the times and is slowly seeing its sales and market share decline. Based on this trend, the firm
recently announced that its next annual dividend will be $.55 a share and that all future dividends will be decreased
by 1.5 percent annually. You require a 9 percent ratenof return on this stock. What is one share of this stock
worth to you today?
a. $5.16
B. $5.24
c. $5.32
d. $7.09
e. $7.33
P0 = $.55 / *.09 − (-.015)] = $5.24
14. The common stock of Bethel Baked Goods is valued at
$8.76 a share. The company increases its dividend by 1.5 percent annually and expects its next dividend to be
$.65 per share. What is the required rate of return on this stock?
a. 6.64 percent
b. 7.53 percent
C. 8.92 percent
d. 9.03 percent
e. 10.17 percent
R = ($.65 / $8.76) + .015 = 8.92 percent
15. Coats & More just announced that it will commence
paying annual dividends next year. It plans to pay $.75 a year for four years, $.90 a year for the following three
years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you
require a 12 percent rate of return?
a. $3.34
B. $3.65
c. $4.09
d. $4.40
e. $5.89
$3.65
$.6696 $.5979 $.5338 $.4766 $.5107 $.4560 $.4071
1.12
$.90
1.12
$.90
1.12
$.90
1.12
$.75
1.12
$.75
1.12
$.75
1.12
$.75 P0 1 2 3 4 5 6 7
16. Jon's Catering is growing at a very fast rate. As a
result, the company expects to increase its dividend to $.45, $.95, $1.60, and $2.15 over the next four years,
respectively. After that, the dividend is projected to increase by 6 percent annually. The last annual dividend the
firm paid was $.30 a share. What is the current value of this stock if the required return is 17 percent?
a. $12.97
b. $13.13
c. $13.77
D. $14.28
e. $14.58
P4 = ($2.15 × 1.06) / (.17 − .06) = $20.718
$14.28
$.3846 $.6940 $.9990 $12.2035
1.17
$2.15 $20.718
1.17
$1.60
1.17
$.95
1.17
$.45 P0 1 2 3 4
17. High Class Jewelry is a specialty company in the fine
jewelry market. Based on its latest projections, the company expects to increase its annual dividend by 20
percent per year for the next two years and by 15 percent per year for the following two years. After that, the
company plans to pay a constant annual dividend of $2.50 a share. The last dividend paid was $1.50 a share. What is the
current value of this stock if the required rate of return is 14 percent?
a. $15.48
b. $15.88
C. $17.18
d. $17.38
e. $18.68
D1 = $1.50 × 1.20 = $1.80
D2 = $1.50 × 1.202
= $2.16
D3 = $1.50 × 1.202
× 1.15 = $2.484
D4 = $1.50 × 1.202
× 1.152
= $2.8566
P4 = $2.50 / .14 = $17.8571
$17.18
$1.5789 $1.6620 $1.6766 $12.2642
1.14
$2.8566 $17.8571
1.14
$2.484
1.14
$2.16
1.14
$1.80 P0 1 2 3 4
18. Alien Industries just paid an annual dividend of $1.50
and is expected to pay annual dividends of $1.65 and $2.805 per share the next two years, respectively. After
that, the firm expects to maintain a constant dividend growth rate of 5 percent per year. What is the value of this
stock today if the required return is 13 percent?
a. $29.56
b. $29.97
c. $30.29
d. $32.06
E. $32.49
$36.8156
.13 .05
$2.805 1.05 P2
$32.49
$1.4602 $31.0287
1.13
$2.805 $36.8156
1.13
$1.65 P0 1 2
19. The required return on Meadowland's stock is 11 percent
and the dividend growth rate is 2.5 percent. The stock is currently selling for $23.50 a share. What is the
dividend yield?
a. 2.59 percent
b. 5.88 percent
C. 8.50 percent
d. 10.00 percent
e. 13.50 percent
Dividend yield = .11 − .025 = .085 = 8.50 percent
20. Happy Valley, Inc. stock is valued at $51.40 a share.
The company pays a constant dividend of $3.80. What is the required return on this stock?
a. 3.70 percent
b. 5.21 percent
C. 7.39 percent
d. 10.56 percent
e. 14.79 percent
R = $3.80 / $51.40 =.07393= 7.39 percent
