Deck 9: Stock Valuation

Question 1

Next year's annual dividend divided by the current stock price is called the:

A) yield to maturity.
B) total yield.
C) dividend yield.
D) capital gains yield.
E) earnings yield.

Answer 1

dividend yield.

Question 2

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

A) current
B) total
C) dividend
D) capital gains
E) earnings

Answer 2

capital gains

Question 3

A stock listing contains the following information: P/E 17.5,closing price 33.10,dividend .80,YTD% chg 3.4,and net chg - .50. Which of the following statements are correct given this information?
I. The stock price has increased by 3.4% during the current year.
II. The closing price on the previous trading day was $32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5%.

A) I and II only
B) I and III only
C) II and III only
D) III and IV only
E) I, III, and IV only

Answer 3

I and III only

Question 4

The constant dividend growth model is:

A) generally used in practice because most stocks have a constant growth rate.
B) generally used in practice because the historical growth rate of most stocks is constant.
C) generally not used in practice because most stocks grow at a non constant rate.
D) generally not used in practice because the constant growth rate is usually higher than the required rate of return.
E) based on the assumption Dow 30 represents a good estimate of the market index.

Question 5

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

A) dual class
B) cumulative
C) deferred
D) preferred
E) common

Question 6

Differential growth refers to a firm that increases its dividend by:

A) three or more percent per year.
B) a rate which is most likely not sustainable over an extended period of time.
C) a constant rate of two or more percent per year.
D) $.10 or more per year.
E) an amount in excess of $.10 a year.

Question 7

The constant dividend growth model: I. assumes that dividends increase at a constant rate forever.
II) can be used to compute a stock price at any point of time.
III) states that the market price of a stock is only affected by the amount of the dividend.
IV) considers capital gains but ignores the dividend yield.

A) I only
B) II only
C) III and IV only
D) I and II only
E) I, II, and III only

Question 8

The discount rate in equity valuation is composed entirely of:

A) the dividends paid and the capital gains yield.
B) the dividend yield and the growth rate.
C) the dividends paid and the growth rate.
D) the capital gains earned and the growth rate.
E) the capital gains earned and the dividends paid.

Question 9

Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.

A) remain constant
B) decrease by 5%
C) increase by 5%
D) increase by 10%
E) increase by 15%

Question 10

The value of common stock today depends on:

A) the expected future holding period and the discount rate.
B) the expected future dividends and the capital gains.
C) the expected future dividends, capital gains and the discount rate.
D) the expected future holding period and capital gains.
E) None of these.

Question 11

The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0,$0,$0,$.10,$.20,and $.30 over the next 6 years,respectively. After that,the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today,is to compute the value of the stock when it reaches constant growth in year:

A) 3
B) 4
C) 5
D) 6
E) 7

Question 12

The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

A) must always show a current liability of $1,000 for dividends payable.
B) is obligated to continue paying $1 per share per year.
C) will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.
D) has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E) must still declare each dividend before it becomes an actual company liability.

Question 13

The underlying assumption of the dividend growth model is that a stock is worth:

A) the same amount to every investor regardless of their desired rate of return.
B) the present value of the future income which the stock generates.
C) an amount computed as the next annual dividend divided by the market rate of return.
D) the same amount as any other stock that pays the same current dividend and has the same required rate of return.
E) an amount computed as the next annual dividend divided by the required rate of return.

Question 14

Payments made by a corporation to its shareholders,in the form of either cash,stock or payments in kind,are called:

A) retained earnings.
B) net income.
C) dividends.
D) redistributions.
E) infused equity.

Question 15

Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now,the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today,you would most likely determine the value of the stock _____ years from today before determining today's value.

A) 4
B) 5
C) 6
D) 7
E) 8

Question 16

The closing price of a stock is quoted at 22.87,with a P/E of 26 and a net change of 1.42. Based on this information,which one of the following statements is correct?

A) The closing price on the previous day was $1.42 higher than today's closing price.
B) A dealer will buy the stock at $22.87 and sell it at $26 a share.
C) The stock increased in value between yesterday's close and today's close by $.0142.
D) The earnings per share are equal to 1/26^th of $22.87.
E) The earnings per share have increased by $1.42 this year.

Question 17

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

A) zero growth
B) dividend growth
C) capital pricing
D) earnings capitalization
E) differential growth

Question 18

The net present value of a growth opportunity,NPVGO,can be defined as:

A) the initial investment necessary for a new project.
B) the net present value per share of an investment in a new project.
C) a continual reinvestment of earnings when r < g.
D) a single period investment when r > g.
E) None of these.

Question 19

Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities,then you should also expect the:

A) market values of all stocks to increase, all else constant.
B) market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.
C) market values of all stocks to decrease, all else constant.
D) stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.
E) dividend growth rates to increase to offset this changE.

Question 20

The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield

A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
E) III and IV only

Question 21

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend increases at an average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What is the market rate of return?

A) 2.5%
B) 3.5%
C) 5.5%
D) 6.0%
E) 9.5%

Question 22

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 23

Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share?

A) 9.5%
B) 11.0%
C) 12.5%
D) 13.5%
E) 15.0%

Question 24

Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be:

A) -4%.
B) 4%.
C) 8%.
D) 12%.
E) 20%.

Question 25

How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?

A) $19.23
B) $20.00
C) $20.40
D) $20.80
E) $21.63

Question 26

The common stock of Eddie's Engines,Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?

A) 7%
B) 9%
C) 11%
D) 13%
E) 15%

Question 27

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 the company's dividend be in six years?

A) $0.90
B) $0.93
C) $1.04
D) $1.07
E) $1.11

Question 28

Weisbro and Sons' common stock sells for $21 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 9%. What is the amount of the last dividend paid by Weisbro and Sons?

A) $.77
B) $.80
C) $.84
D) $.87
E) $.88

Question 29

The common stock of Grady Co. had an 11.25% rate of return last year. The dividend amount was $.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation on the stock?

A) 1.50%
B) 8.00%
C) 9.75%
D) 11.25%
E) 12.75%

Question 30

S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week,the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8%?

A) $71.16
B) $74.01
C) $76.97
D) $80.05
E) $83.25

Question 31

Majestic Homes' stock traditionally provides an 8% rate of return. The company just paid a $2 a year dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of this stock next year,how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?

A) $48.60
B) $52.50
C) $55.13
D) $57.89
E) $70.00

Question 32

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments?

A) $10.00
B) $13.33
C) $16.67
D) $18.88
E) $20.00

Question 33

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 34

Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend?

A) 5.2%
B) 5.5%
C) 5.9%
D) 6.0%
E) 6.3%

Question 35

Martin's Yachts has paid annual dividends of $1.40,$1.75,and $2.00 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 15% rate of return. What is the maximum amount you are willing to pay to buy one share today?

A) $10.00
B) $13.33
C) $16.67
D) $18.88
E) $20.00

Question 36

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 37

A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this stock is 9%,what is the dividend amount?

A) $1.40
B) $1.80
C) $2.20
D) $2.40
E) $2.80

Question 38

You have decided that you would like to own some shares of GH Corp. but need an expected 12% 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 GH stock if the company pays a constant $3.50 annual dividend per share?

A) $26.04
B) $29.17
C) $32.67
D) $34.29
E) $36.59

Question 39

The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?

A) 10.04%
B) 16.07%
C) 21.88%
D) 43.75%
E) 45.94%

Question 40

Angelina's made two announcements concerning its common stock today. First,the company announced that its next annual dividend has been set at $2.16 a share. Secondly,the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

A) $21.60
B) $22.46
C) $27.44
D) $34.62
E) $36.00

Question 41

The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00,$5.00,$7.50,and $10.00 a share over the next four years,respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rate of return is 15%?

A) $17.04
B) $22.39
C) $26.57
D) $29.08
E) $33.71

Question 42

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%.

A) $20.45
B) $21.48
C) $37.50
D) $39.38
E) $47.70

Question 43

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% 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 if the required rate of return is 9.25%?

A) $35.63
B) $38.19
C) $41.05
D) $43.19
E) $45.81

Question 44

Last week,Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?

A) $4.50
B) $7.71
C) $10.80
D) $15.60
E) $27.00

Question 45

If a company paid a dividend of $0.40 last month and it is expected to grow at 7% for the next 6 years and then grow at 4% thereafter,the dividend expected in year 8 is ______.

A) $0.63
B) $0.65
C) $0.68
D) $0.69
E) $0.74

Question 46

Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today. After that time,the company plans on paying a constant $1 a share dividend indefinitely. Given a required return of 14%,what is the value of this stock?

A) $4.82
B) $5.25
C) $5.39
D) $5.46
E) $5.58

Question 47

Beaksley,Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now,the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return,what is this stock worth today?

A) $34.03
B) $37.21
C) $43.78
D) $48.09
E) $53.18

Question 48

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.

A) $9.52
B) $10.88
C) $12.24
D) $17.00
E) None of these.

Question 49

Can't Hold Me Back,Inc. is preparing to pay its first dividends. It is going to pay $1.00,$2.50,and $5.00 a share over the next three years,respectively. After that,the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?

A) $7.20
B) $14.48
C) $18.88
D) $21.78
E) $25.06

Question 50

BC 'n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years are $.30,$.50,$.75,$1.00,and $1.20,respectively. After that time,the dividends will be held constant at $1.40. What is this stock worth today at a 6% discount rate?

A) $20.48
B) $20.60
C) $21.02
D) $21.28
E) $21.43

Question 51

Now or Later,Inc. recently paid $1.10 as an annual dividend. Future dividends are projected at $1.14,$1.18,$1.22,and $1.25 over the next four years,respectively. After that,the dividend is expected to increase by 2% annually. What is one share of this stock worth to you if you require an 8% rate of return on similar investments?

A) $15.62
B) $19.57
C) $21.21
D) $23.33
E) $25.98

Question 52

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. Two weeks ago,the company paid a dividend of $1.40 per share. What is this stock worth if you require a 9% rate of return?

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

Question 53

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.25 a share. The following dividends will be $.40,$.60,and $.75 a share annually for the following three years,respectively. After that,dividends are projected to increase by 3.5% per year. How much are you willing to pay to buy one share of this stock if your desired rate of return is 12%?

A) $1.45
B) $5.80
C) $7.25
D) $9.06
E) $10.58

Question 54

The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The price of the stock should be _______.

A) $9.38
B) $17.05
C) $41.67
D) $59.80
E) $62.38

Question 55

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 56

Nu-Tek,Inc. is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result it is going to reduce its annual dividend by 10% a year for the next three years. After that,it will maintain a constant dividend of $.70 a share. Last month,the company paid $1.80 per share. What is the value of this stock if the required rate of return is 13%?

A) $6.79
B) $7.22
C) $8.22
D) $8.87
E) $9.01

Question 57

The Red Bud Co. just paid a dividend of $1.20 a share. The company announced today that it will continue to pay this constant dividend for the next 3 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7%?

A) $2.94
B) $3.15
C) $3.23
D) $3.44
E) $3.60

Question 58

Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just paid a dividend of $1. This growth rate is expected to continue. How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%.

A) $20.00
B) $21.50
C) $34.75
D) $50.00
E) $51.50

Question 59

The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero,the company will cease all dividends permanently. The required rate of return is 16%. What is one share of this stock worth?

A) $3.76
B) $4.08
C) $4.87
D) $5.13
E) $5.39

Question 60

The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will one share be worth five years from now if the required rate of return is 12%?

A) $21.60
B) $22.36
C) $23.14
D) $23.95
E) $24.79

Question 61

The common stock of Eddie's Engines,Inc. sells for $20 a share. The stock is expected to pay $2 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?

A) 14%
B) 14.4%
C) 15%
D) 17%
E) 19%

Question 62

The Lory Company had net earnings of $127,000 this past year. Dividends of $38,100 were paid. The company's equity was $1,587,500. If Lory has 100,000 shares outstanding with a current market price of $11.625 per share,and the growth rate is 5.6%,what is the required rate of return?

A) 4.2%
B) 6%
C) 9%
D) 14%
E) None of these.

Question 63

Doctors-On-Call,a newly formed medical group,just paid a dividend of $.50. The company's dividend is expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter. What is the value of the stock if the appropriate discount rate is 12%?

A) $8.08
B) $11.17
C) $14.22
D) $17.32
E) $30.90

Question 64

Majestic Homes' stock traditionally provides an 7% rate of return. The company just paid a $2 a year dividend which is expected to increase by 4% per year. If you are planning on buying 1,000 shares of this stock next year,how much should you expect to pay per share if the market rate of return for this type of security is 8% at the time of your purchase?

A) $20.80
B) $52.00
C) $53.20
D) $54.08
E) $72.00

Question 65

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 13% return on your equity investments?

A) $20.00
B) $23.08
C) $25.00
D) $27.32
E) $30.00

Question 66

A stock you are interested in paid a dividend of $1 last month. The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

A) $15.38
B) $20.50
C) $21.04
D) $22.27
E) $26.14

Question 67

A stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

A) $17.20
B) $17.90
C) $18.20
D) $19.40
E) $19.75

Question 68

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15% a year for the next four years and then decreasing the growth rate to 5% 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 if the required rate of return is 10%?

A) $27.62
B) $28.79
C) $29.23
D) $32.15
E) $33.67

Question 69

What is the difference between the enterprise value to EBITDA ratio and the PE ratio?

Question 70

The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is establishing a policy whereby the dividend will increase by 2.5% annually thereafter. How much will one share be worth five years from now if the required rate of return is 15%?

A) $14.12
B) $14.48
C) $14.84
D) $15.60
E) $15.78

Question 71

What are the components of the required rate of return on a share of stock?
Briefly explain each component.

Question 72

A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible?
Does this violate our basic principle of stock valuation?
Explain.

Question 73

Wilbert's Clothing Stores just paid a $1.50 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 15% 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) $1,200
B) $1,292
C) $1,325
D) $1,533
E) $1,700

Question 74

Martin's Yachts has paid annual dividends of $1.70,$1.8,and $2.1 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 10% rate of return. What is the maximum amount you are willing to pay to buy one share today?

A) $10.00
B) $17.00
C) $18.00
D) $21.00
E) $23.10

Question 75

Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond,and explain why.

Question 76

The current yield on Alpha's common stock is 5.2%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.3 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?

A) 10.70%
B) 12.31%
C) 18.29%
D) 20.01%
E) 24.21%

Question 77

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.

A) $114.60
B) $119.43
C) $124.20
D) $129.50
E) $138.75