Exam 5: Basic Stock Valuation

Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year (D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year . The stock's beta is 1.2, the risk-free rate of interest is 6 percent, and the rate of return on the market is 11 percent. What is the company's current stock price?

Which of the following statements is most correct?

A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share . Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company's stock is expected to remain constant. What is the current stock price?

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period.

If a firm's stockholders are given the preemptive right, this means that a group of stockholders can call for a meeting to replace the management. With¬out the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight.

Assume that markets are semistrong efficient, but not strong-from efficient. Which of the following statements is most correct?

Which of the following statements is most correct?

The cash flows associated with common stock are dif¬ficult to evaluate due to the uncertainty and varia¬bility associated with them.

The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.

Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity (rs) is 10 percent. What is the current price of the common stock?

Hadlock Healthcare expects to pay a $3.00 dividend at the end of the year (D1 = $3.00). The stock's dividend is expected to grow at a rate of 10 percent a year until three years from now (t = 3). After this time, the stock's dividend is expected to grow at a constant rate of 5 percent a year. The stock's required rate of return is 11 percent. What is the price of the stock today?

A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the nominal annual rate of return?

A share of preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is your nominal (not effective) annual rate of return?

A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates what investments the firm makes.

Classified stock is one tool companies can use to meet special needs such as when owners of a start-up firm need capital but don't want to relinquish control of the firm.

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm.

Graham Enterprises anticipates that its dividend at the end of the year will be $2.00 a share . The dividend is expected to grow at a constant rate of 7 percent a year. The risk-free rate is 6 percent, the market risk premium is 5 percent, and the company's beta equals 1.2. What is the expected price of the stock five years from now?

The last dividend paid by a company was $2.20. Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a rate of return on equity (rs) of 11 percent. What is the current price of the stock?

According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.