FINC 3304 [QUIZ] Chapter 7 STOCKS AND THEIR VALUATION

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

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

 





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

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



$32.49

$1.4602 $31.0287

1.13

$2.805 $36.8156

1.13

$1.65 P0 1 2

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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