Deck 8: Stock Valuation

Question 1

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Answer 1

True

Question 2

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If
you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you
can only calculate the price now, from the past and into the future.

Answer 2

True

Question 3

Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected
value of the firm's stock at the end of four years (P4) can be calculated using D5/(r - g) and P0 × (1 +
g)4.

Answer 3

True

Question 4

If one uses the constant growth model to value stock, one assumes that P1 = P0 × (1 + g), P2 = P0 × (1
+ g), etc.

Question 5

The dividend growth model assumes that dividends increase at a constant rate forever.

Question 6

All else constant, an increase in the dividend amount will increase the dividend yield of a stock.

Question 7

According to the constant growth model, the dividend yield is equal to the required return minus
the dividend growth rate.

Question 8

An increase in the required return on a stock will decrease its market value, all else the same.

Question 9

The total rate of return earned on a stock is comprised of the dividend yield and the capital gains
yield.

Question 10

Dividends received by both individuals and corporations are fully taxable.

Question 11

A decrease in the dividend growth rate will increase a stock's market value, all else the same.

Question 12

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If
you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you
can only calculate the price into the future.

Question 13

If one uses the perpetuity model to value stock, one assumes that P0 = P1 = . . . = , implying that the annual return from owning the stock is zero.

Question 14

All else constant, a decrease in the dividend amount will increase the dividend yield of a stock.

Question 15

All else constant, an increase in the stock price will increase the dividend yield of a stock.

Question 16

When the constant dividend growth model holds, g = capital gains yield.

Question 17

The total return on a share of stock = dividend yield + capital gains yield.

Question 18

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If
you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you
can only calculate the price now.

Question 19

Dividends paid by a corporation can reduce the taxable income of the corporation.

Question 20

The dividend growth model can be used to compute a stock price at any point of time.

Question 21

Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Preferred
shareholders will benefit from the increased profits that will be generated from this find?

Question 22

Common stock dividends can be either cumulative or non-cumulative.

Question 23

Dividends become a liability of the corporation at the time they are declared.

Question 24

If a firm experiences a financial loss for the year, the loss is shared equally by the debt holders and
equity holders.

Question 25

The total rate of return earned on a stock is comprised of the current yield and the yield to maturity.

Question 26

A firm must make its dividend payments to preferred shareholders before it makes any interest
payments to its bondholders.

Question 27

The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds
the stock's required return.

Question 28

The stockholders determine the amount of dividend to be paid.

Question 29

Dividends are a tax deductible expense.

Question 30

Most preferred stocks have dividends that are cumulative.

Question 31

The dividend growth model considers capital gains but ignores the dividend yield.

Question 32

Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Convertible
preferred shareholders will benefit from the increased profits that will be generated from this find.

Question 33

The dividend growth model states that the market price of a stock is only affected by the amount of
the dividend.

Question 34

The dividend yield on a stock is the annual dividend divided by the par value.

Question 35

A dividend on common stock, whether declared or not, is not a legal liability of the firm.

Question 36

Payment of dividends is a tax deductible business expense for a corporation.

Question 37

Dividends on preferred stock are deductible from taxable income of the issuing firm.

Question 38

Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Common
shareholders will benefit from the increased profits that will be generated from this find.

Question 39

Dividends that have been declared but are not yet paid are liabilities of the corporation.

Question 40

Preferred stock has a stated liquidation value.

Question 41

In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available. The par value of the preferred stock is $100.

A) $1
B) $5
C) $10
D) $50
E) $100

Question 42

The Home Market has adopted a policy of increasing the annual dividend on their common stock at a constant rate of 3.75% annually. The firm is paying an annual dividend of $1.10 today. What will the
Dividend be five years from now?

A) $1.16
B) $1.27
C) $1.32
D) $1.37
E) $1.45

Question 43

Preferred stock is never callable.

Question 44

Redline Motors has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3.5% annually. The last dividend it paid was $1.21 a share. What will its dividend be
7 years from now?

A) $1.44
B) $1.49
C) $1.54
D) $1.56
E) $1.58

Question 45

The partial excludability of dividend income from taxable income makes preferred stock less
desirable to purchasers than it might otherwise be.

Question 46

A missed dividend payment never has to be paid if the preferred stock is cumulative.

Question 47

The daily newspaper lists this information on a stock: Last $36.19, Net Chg -1.63 and Yld% 1.3. What is the amount of the current dividend?

A) $0.44
B) $0.45
C) $0.47
D) $0.49
E) $0.52

Question 48

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD%
chg 3.4, and a net chg of -.50. This means that the closing price on the previous trading day was
$32.60 and the current yield is 17.5%.

Question 49

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD%
chg 3.4, and a net chg of -.50. This means that the stock price has increased by 3.4% during the
current year and the earnings per share are approximately $1.89. The closing price on the previous
trading day was $32.60 and the current yield is 17.5%.

Question 50

Spooner Corporation's next dividend is expected to be $6. Dividend growth is estimated at 25%, 20%, 10% and then stabilize to 3%. If the rate of return is 10%, determine the stock price in year 2.

A) $98.64
B) $99.61
C) $100.64
D) $101.64
E) $102.64

Question 51

All preferred stock has an obligatory sinking fund.

Question 52

The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will its dividend be
In six years?

A) $.90
B) $.93
C) $1.04
D) $1.07
E) $1.11

Question 53

The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is
The expected amount of the next dividend to be paid on Energizer's common stock?

A) $.90
B) $1.00
C) $1.10
D) $1.21
E) $1.33

Question 54

RTF, Inc. common stock sells for $22 a share and pays an annual dividend that increases by 3.8% annually. The market rate of return on this stock is 8.2%. What is the amount of the last dividend
Paid?

A) $0.88
B) $0.90
C) $0.93
D) $0.97
E) $1.00

Question 55

Wilbert's Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5% annually. You would like to purchase 100 shares of stock in this firm but
Realize that you will not have the funds to do so for another three years. If you desire a 10% rate of
Return, how much should you expect to pay for 100 shares when you can afford to buy this stock?
Ignore trading costs.

A) $1,640
B) $1,681
C) $1,723
D) $1,766
E) $1,810

Question 56

For income tax purposes, preferred stock is more like debt than it is like common stock.

Question 57

The price-earnings ratios for TSX stocks which are listed in The National Post are based on
earnings per share for the past year.

Question 58

For the current year, the expected dividend per share is:

A) $1.10
B) $1.30
C) $1.32
D) $2.10
E) $4.40

Question 59

Winter Green Decors announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.40 a share. The following dividends will be $.60, $.85, and
$1)00 a share annually for the following 3 years, respectively. After that, dividends are projected to
Increase by 2% per year. How much are you willing to pay to buy one share of this stock today if
Your desired rate of return is 10%?

A) $10.70
B) $10.89
C) $11.11
D) $11.17
E) $11.23

Question 60

If a company has a current stock price of $78, an EPS of $1.10/share; EPS growth rate of 20% and the investors rate of return is 11.50%, calculate the cash cow price.

A) $8.57
B) $9.57
C) $10.57
D) $11.57
E) $12.57

Question 61

If a company has a current stock price of $25, an EPS of $2.75/share; EPS growth rate of 15% and the investors rate of return is 20%, calculate the NPVGO.

A) $10.75
B) $11.25
C) $11.75
D) $12.25
E) $12.75

Question 62

Jessica's Pharmacy made two announcements concerning their common stock today. First, the company announced the next annual dividend will be $1.48 a share. Secondly, all dividends after
That will increase by 2.5% annually. What is the maximum amount you should pay to purchase a
Share of this stock if your goal is to earn a 12% rate of return?

A) $12.33
B) $12.64
C) $13.27
D) $15.58
E) $15.97

Question 63

Daily Movers is a relatively new firm. The company paid its first annual dividend yesterday in the amount of $.40 a share. The company plans to double each annual dividend payment for the next 2
Years. After that time, it is planning on paying a constant $2 per share indefinitely. What is one
Share of this stock worth today if the market rate of return on similar securities is 14.5%?

A) $12.17
B) $12.44
C) $12.68
D) $12.84
E) $12.87

Question 64

What would you pay today for a stock that is expected to make a $1.50 dividend in one year if the expected dividend growth rate is 3% and you require a 16% return on your investment?

A) $11.54
B) $12.33
C) $12.43
D) $13.14
E) $14.30

Question 65

Treynor Industries has paid annual dividends of $1.55, $1.70, and $1.85 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its
Business has leveled off and sales are expected to remain relatively constant. Given the lack of
Future growth, you will only buy this stock if you can earn at least a 16% rate of return. What is the
Maximum amount you are willing to pay to buy one share of this stock today?

A) $9.97
B) $11.56
C) $12.78
D) $13.41
E) $13.54

Question 66

Simplicity is a relatively new firm that appears to be on the road to great success. The company paid their first annual dividend yesterday in the amount of $0.15 a share. The company plans to
Double each annual dividend payment for the next four years. After that time, they are planning on
Paying a constant dividend of $2.50 per share indefinitely. What is one share of this stock worth
Today if the market rate of return on similar securities is 13.45%?

A) $12.32
B) $12.77
C) $13.77
D) $14.22
E) $14.37

Question 67

Energistics, Inc. plans to retain and reinvest all of its earnings for the next three years; at the end of year 3 the firm will pay a special dividend of $5 per share. Beginning in year 4, the firm will begin to
Pay a dividend of $1 per share, which is expected to grow at a 3% rate annually forever. Given a
Required return of 12%, the stock should sell for _____ today.

A) $11.47
B) $12.44
C) $13.15
D) $14.27
E) $15.01

Question 68

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As its target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and
Dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given
A required return is 12%, the price of the stock in two years will be:

A) $9.45
B) $11.52
C) $13.82
D) $14.98
E) $29.95

Question 69

You have decided you would like to own some shares of the Clean Coal Company but need a 16% rate of return to compensate for the perceived risk of such ownership. What is the maximum you
Are willing to spend per share to buy this stock if the company pays a constant $1.75 annual
Dividend per share?

A) $9.19
B) $10.94
C) $12.69
D) $18.60
E) $22.81

Question 70

MDK, Inc. is a high growth firm that has never paid a dividend. The company just issued a press release stating that next year it plans on paying an annual dividend of $0.34. It also stated that
Dividends are expected to increase by 40% a year for each of the following four years and then
Increase by 4% annually thereafter. The required rate of return on this stock is 15%. What is the
Expected price per share of MDK stock six years from now?

A) $9.12
B) $9.42
C) $12.35
D) $12.84
E) $14.14

Question 71

Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate
Discount rate is 14%?

A) $7.14
B) $7.50
C) $11.11
D) $11.67
E) $12.25

Question 72

What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 12%, and the stock is expected to be worth $110
One year from now?

A) $95
B) $100
C) $110
D) $115
E) $120

Question 73

Massey Motors is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 10% a year for the next 3 years and then decreasing the growth rate to 4%
Per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the
Current value of one share of this stock if the required rate of return is 13.75%?

A) $12.08
B) $12.21
C) $12.26
D) $12.37
E) $12.45

Question 74

Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The
Company plans to double each annual dividend payment for the next three years. After that time, it
Is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth
Today if the market rate of return on similar securities is 11.5%?

A) $9.41
B) $11.40
C) $11.46
D) $11.93
E) $12.43

Question 75

Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25% a year for the next three years and then decreasing the growth rate to 6%
Per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the
Current value of one share of this stock if the required rate of return is 17%?

A) $11.17
B) $12.14
C) $12.94
D) $14.27
E) $15.06

Question 76

Morris, Inc. has some 8% preferred stock outstanding. The par value of the preferred stock is $100. How much are you willing to pay for one share of Morris preferred stock if you require a 7% rate of
Return?

A) $87.50
B) $98.11
C) $114.29
D) $123.87
E) $125.14

Question 77

The Double Dip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5%
A year for the next two years. After that, it will maintain a constant dividend of $1 a share. Last year,
The company paid $1.40 per share. What is this stock worth to you if you require a 9% rate of return?

A) $10.86
B) $11.11
C) $11.64
D) $12.98
E) $14.23

Question 78

A 6% preferred stock pays _____ a year in dividends per share. The par value of the preferred stock is $100.

A) $3
B) $6
C) $12
D) $30
E) $60

Question 79

Shirley's Cool Treats is expecting their ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that they will be reducing their annual dividend
By 4% a year for the next four years. After that, they will maintain a constant dividend of $1 a share.
Last year, the company paid $1.80 per share. What is this stock worth to you if you require a 12%
Rate of return?

A) $9.29
B) $10.27
C) $11.30
D) $12.07
E) $13.10

Question 80

How much are you willing to pay for one share of Delphia stock if the company just paid a $1.34 annual dividend, the dividends increase by 2.8% annually, and you require a 14% rate of return?

A) $9.84
B) $11.96
C) $12.30
D) $12.99
E) $13.61