Chapter 08
Stock Valuation
Multiple Choice Questions
1
. What is the model called that determines the present value of a stock based on its next annual dividend, the
dividend growth rate, and the applicable discount rate?
A. Zero growth.
B. Dividend growth.
C. Capital pricing.
D. Earnings capitalization.
E. Discounted dividend.
2
. Which one of the following is computed by dividing next year's annual dividend by the current stock price?
A. Yield to maturity.
B. Total yield.
C. Dividend yield.
D. Capital gains yield.
E. Growth rate.
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3
. Which one of following is the rate at which a stock's price is expected to appreciate?
A. Current yield.
B. Total return
C. Dividend yield.
D. Capital gains yield.
E. Coupon rate.
4
. Which one of the following types of stock is defined by the fact that it receives no preferential treatment in
respect to either dividends or bankruptcy proceedings?
A. Dual class.
B. Cumulative.
C. Non-cumulative.
D. Preferred.
E. Common.
5
. A company has four open seats on its board of directors. There are seven candidates vying for these four
positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will
receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate.
What is this type of voting called?
A. Democratic.
B. Cumulative.
C. Straight.
D. Deferred.
E. Proxy.
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6
. You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who
will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected
to the board. What is the type of voting called that requires this level of stock ownership to be successfully
elected?
A. Democratic.
B. Cumulative.
C. Straight.
D. Deferred.
E. Proxy.
7
. You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on
your behalf. What is the granting of this authority called?
A. Alternative voting.
B. Cumulative voting.
C. Straight voting.
D. Indenture voting.
E. Voting by proxy.
8
. What are the distributions of either cash or stock to shareholders by a corporation called?
A. Coupon payments.
B. Retained earnings.
C. Dividends.
D. Capital payments.
E. Diluted profits.
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9
. Which one of the following is a type of equity security that has a fixed dividend and a priority status over other
equity securities?
A. Senior bond.
B. Debenture.
C. Warrant.
D. Common stock.
E. Preferred stock.
10
. Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the
general public. This sale will definitely occur in which one of the following markets?
A. Private.
B. Auction.
C.Tertiary.
D.Secondary.
E. Primary.
11
. The secondary market is best defined by which one of the following?
A. Market in which subordinated shares are issued and resold.
B. Market conducted solely by brokers.
C.Market dominated by dealers.
D.Market where outstanding shares of stock are resold.
E. Market where warrants are offered and sold.
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12
. An agent who maintains an inventory from which he or she buys and sells securities is called a:
A. Broker.
B. Trader.
C.Capitalist.
D.Principal.
E. Dealer.
13
. An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
A. Broker.
B. Floor trader.
C.Capitalist.
D.Principal.
E. Dealer.
14
. The owner of a trading license for the NYSE is called a:
A. Broker.
B. Member.
C.Agent.
D.Specialist.
E. Dealer.
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15
. A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):
A. Floor trader.
B. Dealer.
C.Specialist.
D.Executor.
E. Commission broker.
16
. A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:
A. Floor trader.
B. Floor post.
C.designated market maker.
D.Floor broker.
E. Commission broker.
17
. A floor broker on the NYSE does which one of the following?
A. Supervises the commission brokers of a specific financial firm.
B. Trades for his or her personal inventory.
C.Executes orders on behalf of a commission broker.
D.Maintains an inventory and assumes the role of a market maker.
E. Is charged with maintaining a liquid, orderly market.
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18
. An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal
account is called a:
A. Floor trader.
B. Exchange customer.
C.Specialist.
D.Floor broker.
E. Market maker.
19
. Which one of the following is the electronic system used by the NYSE for directly transmitting orders to
specialists?
A. DMM post.
B. SuperDOT.
C.DMM.
D.SLP.
E. OrderNET.
20
. The stream of customer orders coming in to the NYSE trading floor is called the:
A. Paper trail.
B. Trading volume.
C.Order flow.
D.Bid-ask spread.
E. Commission trail.
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21
. The counter area on the floor of the NYSE where a designated market maker operates is called a:
A. Pit.
B. Hot spot.
C.Seat.
D.Post.
E. Platform.
22
. A securities market primarily composed of dealers who buy and sell for their own inventories is referred to
which type of market?
A. Auction.
B. Private.
C.Over-the-counter.
D.Regional.
E. Insider.
23
. NASDAQ has:
A. An electronic network that transmits orders directly to the trading floor.
B. Both floor and commission brokers.
C.Three separate markets.
D.A single designated market maker for each listed stock.
E. Level 3 data available online for easy access by all investors.
8-8
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24
. National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and
is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:
A. Basically worthless as it offers no growth potential.
B. Equal in value to the present value of $1 paid one year from today.
C.Priced the same as a $1 perpetuity.
D.Valued at an assumed growth rate of 1 percent.
E. Worth $1 a share in the current market.
25
. A decrease in which of the following will increase the current value of a stock according to the dividend growth
model?
A. Dividend amount.
B. Number of future dividends, provided the number is less than infinite.
C.Dividend growth rate.
D.Discount rate.
E. Both the discount rate and the dividend growth rate.
26
. Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75
percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on
increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of
Northern Culture has a higher ______ than the stock of Dixie South.
A. Market price.
B. Dividend yield.
C.Capital gains yield.
D.Total return.
E. Real return.
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27
. The dividend growth model:
A. Only values stocks at Time 0.
B. Cannot be used to value constant dividend stocks.
C.Can be used to value both dividend-paying and non-dividend-paying stocks.
D.Requires the growth rate to be less than the required return.
E.
Assumes dividends increase at a decreasing rate.
28
. Which one of the following applies to the dividend growth model?
A. An individual stock has the same value to every investor.
B. Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
C.Zero-growth stocks have no market value.
D.Stocks that pay the same annual dividend will have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.
29
. Answer this question based on the dividend growth model. If you expect the market rate of return to increase
across the board on all equity securities, then you should also expect:
A. An increase in all stock values.
B. All stock values to remain constant.
C.A decrease in all stock values.
D. Dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.
E. Dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.
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30
. Which one of the following statements is correct concerning the two-stage dividend growth model?
A. g1 cannot be negative.
B. Pt = Dt/ R.
C.g1 must be greater than g2.
D.g1 can be greater than R.
E. R must be less than g1 but greater than g2.
31
. Which one of the following statements is correct?
A. Stocks can only be assigned one dividend growth rate.
B. Preferred stocks generally have constant growth rates.
C.Dividend growth rates must be either zero or positive.
D.All stocks can be valued using the dividend discount models.
E. Stocks can have negative growth rates.
32
. Supernormal growth is a growth rate that:
A. Is both positive and follows a year or more of negative growth.
B. Exceeds a firm's previous year's rate of growth.
C.Is generally constant for an infinite period of time.
D.Is unsustainable over the long term.
E. Applies to a single, abnormal year.
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33
. Which one of the following represents the capital gains yield as used in the dividend growth model?
A. D1
B. D1 / P0
C.P0
D.g
E. g / P0
34
. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the
following must be true?
A. The dividend must be constant.
B. The stock has a negative capital gains yield.
C.The dividend yield must be zero.
D.The required rate of return for this stock increased over the year.
E. The firm is experiencing supernormal growth.
35
. The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock
will:
A. Pay an increasing dividend for a period of time and then cease paying dividends altogether.
B. Increase the dividend amount every other year.
C. Pay a constant dividend for the first two quarters of each year and then increase the dividend the last two
quarters of each year.
D. Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
E. Pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then
commence paying increasing dividends for an indefinite period of time.
8-12
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36.
Which one of the following sets of dividend payments best meets the definition of two-stage growth as it
applies to the two-stage dividend growth model?
A. No dividends for five years, then increasing dividends forever
B. $1 per share annual dividend for two years, then $1.25 annual dividends forever
C. Decreasing dividends for six years followed by one final liquidating dividend payment
D. Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a
constant dividend thereafter
E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase
by 3 percent annually thereafter
37
. Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?
A. Electing the board of directors.
B. Receiving a distribution of company profits.
C.Voting either for or against a proposed merger or acquisition.
D.Determining the amount of the dividend to be paid per share.
E. Having first chance to purchase any new equity shares that may be offered.
38
. Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has
a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to
elect three new directors. Which one of the following statements must be true given this information?
A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board.
B. If straight voting applies, Jen is assured a seat on the board.
C.If straight voting applies, Jen can control all of the open seats.
D.If cumulative voting applies, Jen is assured one seat on the board.
E. If cumulative voting applies, Jen can control all of the open seats.
8-13
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39
. The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want
personal control over the firm. What is the minimum percentage of the outstanding shares one of these
shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight
voting?
A. 17 percent
B. 20 percent plus one vote
C.25 percent plus one vote
D.50 percent plus one vote
E. 51 percent
40
. Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own
enough shares to personally control the elections but are determined to oust the current leadership. Likewise,
no other single shareholder owns sufficient shares to personally control the outcome of the election. Which
one of the following is the most likely outcome of this situation given that some shareholders are happy with
the existing management?
A. Negotiated settlement where each side is granted control over one of the open seats.
B. Protracted legal battle over control of the board of directors.
C.Arbitrated settlement where the arbitrator determines who will be elected to the board.
D.Control of the board decided without your influence.
E. Proxy fight for control of the board.
8-14
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41
. Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of
the following rights is most apt to be granted to the preferred shareholders?
A. Right to share in company profits prior to other shareholders.
B. Right to elect the corporate directors.
C.Right to vote on proposed mergers.
D.Right to all residual income after the common dividends have been paid.
E. Right to a permanent seat on the board of directors.
42
. Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share
of common stock. The firm has 1,000 shares of stock outstanding. The company:
A. Must always show a current liability of $2,400, ($2.40 ×1,000), for dividends payable.
B. Must still declare each dividend before it becomes an actual company liability.
C.Is obligated to pay $2.40 per share each year in perpetuity.
D.Will be declared in default if it does not pay at least $2.40 per share per year on a timely basis.
E. Has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
43
. Which one of the following statements related to corporate dividends is correct?
A. Dividends are nontaxable income to shareholders.
B. Dividends reduce the taxable income of the corporation.
C.The chief executive officer of a corporation is responsible for declaring dividends.
D.The chief financial officer of a corporation determines the amount of dividend to be paid.
E. Corporate shareholders may receive a tax break on a portion of their dividend income.
8-15
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44
. Which one of these statements related to preferred stock is correct?
A. Preferred shareholders normally receive one vote per share of stock owned.
B. Preferred shareholders determine the outcome of any election that involves a proxy fight.
C.Preferred shareholders are considered to be the residual owners of a corporation.
D.Preferred stock normally has a stated liquidating value of $1,000 per share.
E. Cumulative preferred shares are more valuable than comparable noncumulative shares.
45
. You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently
suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been
arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred
shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next
dividend is paid.
A. 0
B. 1
C.2
D.3
E. Either 1, 2, or 3
46
. Preferred stock may have all of the following characteristics in common with bonds with the exception of:
A. The lack of voting rights.
B. A possible conversion option into common stock.
C.Annuity payments.
D.A fixed liquidation value.
E. Tax-deductible payments.
8-16
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47
. NYSE designated market makers:
A. Execute trades on behalf of their clients.
B. Are guaranteed a profit on every stock purchased and resold.
C.Act as dealers.
D.Provide a one-sided market.
E. Are also referred to as "$2 brokers.
48
. Which one of the following statements related to the NYSE is correct?
A. Exchange members must purchase trading licenses.
B. NYSE shareholders currently own "seats" on the exchange.
C.DMM's buy at the asked price.
D.The NYSE is privately owned by an investment firm.
E. Electronic trading has increased the demand for floor brokers.
49
. Which one of the following transactions occurs in the primary market?
A. Purchase of 500 shares of GE stock from a current shareholder.
B. Gift of 100 shares of stock to a charitable organization.
C.Gift of 200 shares of stock by a mother to her daughter.
D.A purchase of newly issued stock from ATamp;T.
E. IBM's purchase of GE stock from a dealer.
8-17
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50
. Which one of the following statements applies to NASDAQ?
A. Composed of four separate markets.
B. Exchange floor located in Chicago.
C.Provides two levels of information access.
D.DMM system.
E. Multiple market maker system.
51
. Which one of the following best describes NASDAQ?
A. Dealer price at which they will buy is listed as the asked price.
B. Market where the DMM’s are located at posts.
C.Computer network of securities dealers.
D.Market with three physical trading floors.
E.
Largest U.S. stock market in terms of dollar trading volume.
52
. Who can access Level 3 of NASDAQ’s information?
A. Only NASDAQ regulators.
B. Customers who pay an access fee.
C.NASDAQ market makers.
D.There is no Level 3.
E.
Anyone with internet access.
8-18
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53
. A forward PE is based on:
A. the last dividend payment multiplied by 2.
B. historical earnings. .
C.estimated future earnings.
D.industry averages.
E.
the last four quarterly dividend payments.
54
. The typical range for the price-sales ratio is ___ but younger, faster-growing firms may have ratios that are
much _____.
A. 1.8 - 2.5; lower
B. 2.0 - 3.5; lower
C..5 - 1.5; higher
D.
.8 - 2.0; higher
E.
1.8 - 3.0; higher
8-19
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55
. Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced
that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how
much are you willing to pay to purchase one share of this stock today?
A. $18.23
B. $16.00
C.$16.67
D.$17.68
E. $15.57
56
. Dee's made two announcements concerning its common stock today. First, the company announced that the
next annual dividend will be $1.94 a share. Secondly, all dividends after that will decrease by 1.25 percent
annually. What is the value of this stock at a discount rate of 14.5 percent?
A. $12.32
B. $12.10
C.$14.82
D.$14.51
E. $14.21
8-20
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57
. How much are you willing to pay for one share of LBM stock if the company just paid a $1.23 annual dividend,
the dividends increase by 3.1 percent annually, and you require a return of 16 percent?
A. $9.29
B. $9.33
C.$9.83
D.$10.21
E. $9.59
58
. Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to
increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of
return is 15 percent?
A. $25.06
B. $26.30
C.$24.56
D.$26.94
E. $27.59
8-21
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59
. Yummy Bakery just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2
percent per year. If you are planning to buy 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 14 percent at the time of your purchase?
A. $19.89
B. $18.16
C.$18.83
D.$19.47
E. $20.20
60
. The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has
promised to maintain a constant dividend even though economic times are tough. How much are you willing to
pay for one share of this stock if you want to earn a 13.6 percent annual return?
A. $13.53
B. $14.01
C.$14.56
D.$13.79
E. $13.28
8-22
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61
. GEO Inc. has paid annual dividends of $.41, $.47, and $.52 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 flat. Given the lack of future growth, you will only buy this stock if you can
earn at least a rate of return of 16 percent. What is the maximum amount you are willing to pay for one share
of this stock today?
A. $2.85
B. $3.25
C.$2.43
D.$3.09
E. $3.18
62
. The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share
next year when the annual dividend is distributed. The firm has established a pattern of increasing its
dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this
stock?
A. 7.59 percent
B. 7.43 percent
C.7.67 percent
D.7.14 percent
E. 7.28 percent
8-23
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63
. The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual
dividend and announced plans to pay $1.27 next year. The dividend growth rate is expected to remain
constant at the current level. What is the required rate of return on this stock?
A. 5.14 percent
B. 5.82 percent
C.6.08 percent
D.6.39 percent
E. 6.75 percent
64
. Southern Markets recently paid a $2.80 annual dividend on its common stock. This dividend increases at an
average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate
of return?
A. 13.88 percent
B. 14.07 percent
C.14.21 percent
D.14.37 percent
E. 14.60 percent
8-24
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65
. The Uptowner will pay an annual dividend of $1.98 a share next year with future dividends increasing by 2.8
percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?
A. 6.55 percent
B. 7.13 percent
C.7.46 percent
D.6.83 percent
E. 8.29 percent
66
. Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was
$2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?
A. 16.66 percent
B. 16.48 percent
C.13.35 percent
D.14.20 percent
E. 12.46 percent
67
. Gee-Gee common stock returned a nifty 21.6 percent rate of return last year. The dividend amount was $.25 a
share which equated to a dividend yield of 1.01 percent. What was the rate of price appreciation for the year?
A. 20.59 percent
B. 21.38 percent
C.23.60 percent
D.22.87 percent
E. 21.52 percent
8-25
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68
. Roy's Welding common stock sells for $48.96 a share and pays an annual dividend that increases by 2.5
percent annually. The market rate of return on this stock is 14.6 percent. What is the amount of the last
dividend paid?
A. $4.80
B. $5.86
C.$5.78
D.$4.98
E. $5.64
69
. Flo's Flowers pays an annual dividend that is expected to increase by 2.1 percent per year. The stock
commands a market rate of return of 13.8 percent and sells for $19.06 a share. What is the expected amount
of the next dividend?
A. $2.03
B. $2.23
C.$2.37
D.$2.32
E. $2.28
8-26
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70
. The Garden Shoppe has adopted a policy of increasing the annual dividend on its common stock at a
constant rate of 1.65 percent annually. The firm just paid an annual dividend of $1.84. What will the dividend
be eight years from now?
A. $1.88
B. $1.92
C.$2.10
D.$2.02
E. $2.15
71
. A stock pays a constant annual dividend and sells for $56.07 a share. If the market rate of return on this stock
is 12.2 percent, what is the amount of the next annual dividend?
A. $5.67
B. $5.94
C.$6.21
D.$6.84
E. $7.30
8-27
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72
. You want to purchase some shares of JJ Farms stock but need a 14.5 percent rate of return to compensate
for the perceived risk. What is the maximum you are willing to spend per share to buy this stock if the
company pays a constant $1.25 annual dividend per share?
A. $9.11
B. $8.62
C.$9.26
D.$9.38
E. $8.47
73
. Home Products common stock sells for $18.31 a share and has a market rate of return of 12.8 percent. The
company just paid an annual dividend of $1.42 per share. What is the dividend growth rate?
A. 5.27 percent
B. 4.45 percent
C.5.01 percent
D.4.29 percent
E. 4.68 percent
8-28
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74
. Gee-Gee's is going to pay an annual dividend of $2.05 a share on its common stock next year. This year, the
company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy.
What will one share of this common stock be worth five years from now if the applicable discount rate is 10.9
percent?
A. $26.94
B. $28.30
C.$26.28
D.$27.61
E. $27.00
75
. The UpTowner just paid a $3.45 annual dividend. The company has a policy of increasing the dividend by 4.5
percent 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 four years. If you require a 14.8 percent rate of return, how much will you be
willing to pay per share for the 100 shares when you can afford to make this investment?
A. $42.50
B. $41.74
C.$43.12
D.$38.78
E. $44.47
8-29
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76
. Global Logistics just announced it is increasing its annual dividend to $1.68 next year and establishing a
policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this
stock be worth ten years from now if the required rate of return is 13.5 percent?
A. $22.57
B. $21.68
C.$26.51
D.$27.02
E. $27.37
77
. Hot Teas common stock is currently selling for $41.04. The last annual dividend paid was $1.31 per share and
the market rate of return is 11.2 percent. At what rate is the dividend growing?
A. 7.76 percent
B. 6.67 percent
C.8.42 percent
D.8.60 percent
E. 6.10 percent
8-30
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78
. Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual
dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per
year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of
one share of this stock if the required rate of return is 15.5 percent?
A. $1.82
B. $2.04
C.$2.49
D.$2.71
E. $3.05
79
. Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying
$1.55, $1.63, and $1.65 a share over the next three years, respectively. After that, the dividend will be
constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11
percent?
A. $13.98
B. $14.07
C.$15.23
D.$17.16
E. $13.10
8-31
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80
. KNJ Companies is preparing to pay dividends of $.52, $.60, and $.75 a share over the next three years,
respectively. After that, the annual dividend will be $1.10 per share indefinitely. What is this stock worth to you
per share if you require a return of 9.8 percent?
A. $6.67
B. $8.21
C.$10.02
D.$11.47
E. $12.03
81
. Distant Groves announced today that it will begin paying annual dividends next year. Dividends for the first
three years will be $.15, $.20, and $.25 a share, respectively. After that, dividends are projected to increase by
4 percent per year. What is one share of this stock worth today at a required return of 8.5 percent?
A. $5.17
B. $4.94
C.$5.03
D.$4.55
E. $4.86
8-32
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82
. Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and
$4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to
increase by 3.25 percent annually. What is one share of this stock worth to you today if you require a 12.5
percent rate of return on similar investments?
A. $42.92
B. $43.40
C.$45.12
D.$45.88
E. $46.50
83
. The Sly Fox pays a constant dividend of $1.46 a share. The company announced today that it will continue to
pay the dividend for another two years and then in year 3 it will pay a final liquidating dividend of $15.25 a
share. What is one share of this stock worth today at a required return of 18.5%?
A. $12.92
B. $11.44
C.$12.07
D.$13.09
E. $14.20
8-33
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84
. New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per
share for two years. After that, the company plans on paying a constant $.75 a share annual dividend
indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8
percent?
A. $3.78
B. $3.56
C.$4.37
D.$4.71
E. $4.98
85
. Sweatshirts Ltd. is downsizing. The company paid a $3.80 annual dividend last year and has announced
plans to lower the dividend by 30 percent each year. Once the dividend amount becomes zero, the company
will go out of business. You have a required rate of return of 18 percent on this particular stock given the
company's situation. What are your shares in this firm worth today on a per share basis?
A. $5.54
B. $6.91
C.$3.68
D.$1.29
E. $2.11
8-34
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86
. DT Motors paid its first annual dividend yesterday in the amount of $.15 a share. The company plans to
double the dividend in each of the next 3 years. Starting in year 4, the firm plans to pay $1.50 a share
indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.2
percent?
A. $11.02
B. $10.77
C.$11.37
D.$10.26
E. $11.79
87
. Sew ‘N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45,
$1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at
$1.60 per share. What is this stock worth today at a discount rate of 9 percent?
A. $17.08
B. $16.30
C.$16.67
D.$16.79
E. $17.50
8-35
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88
. Home Parties is paying an annual dividend of $1.25 every other year. The last dividend was paid last year.
The firm will continue this policy until two more dividend payments have been paid. One year after the last
normal dividend payment, the company plans to pay a final liquidating dividend of $25 per share. What is the
current market value of this stock if the required return is 17 percent?
A. $18.92
B. $15.19
C.$13.16
D.$17.14
E. $17.53
89
. Next year, Jensen's will pay an annual dividend of $2.75 per share. The company has been reducing the
dividends by 10 percent annually. How much are you willing to pay today to purchase stock in this company if
your required rate of return is 11.5 percent?
A. $11.92
B. $17.87
C.$12.79
D.18.33
E. $16.50
8-36
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90
. Kay's Sewing Loft 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 percent a year for the next
two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid a $3
dividend per share. What is the market value of this stock if the required rate of return is 12.5 percent?
A. $14.63
B. $16.96
C.$18.08
D.$19.61
E. $18.84
91
. Your local toy store just announced that it will pay a $4 dividend next year, $3 the following year, and then a
final liquidating dividend of $46 a share in year 3. At a discount rate of 14 percent, what should one share sell
for today?
A. $46.21
B. $47.48
C.$45.64
D.$39.09
E. $36.87
8-37
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92
. J&J Foods wants to issue some 6.5 percent preferred stock that has a stated liquidating value of $100 a
share. The company has determined that stocks with similar characteristics provide a return of 9.5 percent.
What should the offer price be?
A. $77.26
B. $71.38
C.$64.20
D.$68.42
E. $62.60
93
. A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What is the rate of return on
this security?
A. 9.38 percent
B. 9.63 percent
C.11.52 percent
D.10.72 percent
E. 11.84 percent
94
. A preferred stock sells for $54.45 a share and provides a return of 9.826 percent. What is the amount of the
dividend per share?
A. $5.45
B. $5.25
C.$5.35
D.$5.60
E. $5.50
8-38
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95
. A preferred stock pays a $4.50 annual dividend. What is the maximum price you are willing to pay for one
share of this stock today if your required return is 8.5 percent?
A. $41.47
B. $35.48
C.$38.25
D.$52.94
E. $57.50
96
. The Grist Mill just paid a dividend of $1.46 per share on its stock. The dividends are expected to grow at a
constant rate of 3.5 percent per year, indefinitely. What will the price of this stock be in 5 years if investors
require an annual return of 15 percent?
A. $15.08
B. $15.24
C.$15.83
D.$15.61
E. $15.33
8-39
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97
. The next dividend payment by HG Enterprises will be $2.35 per share. The dividends are anticipated to
maintain a 2.5 percent growth rate forever. The stock currently sells for $54.60 per share. What is the dividend
yield?
A. 4.20 percent
B. 4.30 percent
C.4.81 percent
D.4.50 percent
E. 4.41 percent
98
. AC Electric just paid a $2.10 per share annual dividend. The firm pledges to increase its dividend by 2.4
percent for the next five years and then maintain a constant 2 percent rate of dividend growth. If the required
return is 15 percent, what is the current value of one share of this stock?
A. $25.07
B. $23.09
C.$22.22
D.$18.47
E. $16.74
8-40
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99
. Suppose you know a company's stock currently sells for $85 per share and the required return is 10 percent.
You also know that the total return on the stock is evenly divided between the capital gains yield and the
dividend yield. What is the current dividend per share if it's the company's policy to always maintain a constant
growth rate in its dividends?
A. $4.25
B. $4.05
C.$4.37
D.$4.50
E. $4.64
10
0. Whistle Stop pays a constant annual $8 dividend on its stock. The company will maintain this dividend for the
next eight years and will then cease paying dividends forever. What is the current price per share if the
required return on this stock is 12.6 percent?
A. $37.78
B. $42.48
C.$38.92
D.$36.67
E. $63.49
8-41
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McGraw-Hill Education.
10
1. Morris Companies has an issue of preferred stock outstanding that pays a $7.75 dividend every year in
perpetuity. What is the required return if this issue currently sells for $68.19 per share?
A. 11.37 percent
B. 11.72 percent
C.11.80 percent
D.11.86 percent
E. 10.95 percent
10
2. Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 15 years, because
the firm needs to plow back its earnings to fuel growth. The company plans to pay a $6 per share dividend in
16 years and will increase the dividend by 4 percent per year thereafter. What is the current share price if the
required return on this stock is 16 percent?
A. $5.40
B. $5.62
C.$8.59
D.$50.00
E. $52.00
8-42
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10
3. Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has
announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay
another dividend. How much are you willing to pay per share today to buy this stock if you require a 10
percent return?
A. $27.08
B. $24.15
C.$26.57
D.$32.60
E. $33.33
10
4. K's Fashions is growing quickly. Dividends are expected to increase by 15 percent annually for the next three
years, with the growth rate falling off to a constant 5 percent thereafter. The required return is 16 percent and
the company just paid a $3.80 annual dividend. What is the current share price?
A. $28.96
B. $31.11
C.$46.55
D.$48.87
E. $52.20
8-43
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10
5. Timber Co. is a mature manufacturing firm. The company just paid a $5.40 annual dividend and
management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to
pay today per share to buy this stock if you require a return of 14.5 percent?
A. $34.79
B. $20.91
C.$18.27
D.$89.35
E. $98.18
10
6. Farm Machinery stock currently sells for $65 per share. The market requires a return of 14 percent while the
company maintains a constant 8 percent growth rate in dividends. What was the most recent annual dividend
per share paid on this stock?
A. $3.00
B. $3.61
C.$3.67
D.$3.75
E. $3.91
8-44
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McGraw-Hill Education.
10
7. Electric Utilities just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity
beginning 10 years from now. What is one share of this stock worth today if the market requires a return of 9
percent on this investment?
A. $102.32
B. $104.16
C.$109.08
D.$141.41
E. $151.43
10
8. Farmco just paid a dividend of $.20 per share. The dividends are expected to grow at 20 percent annually for
the next 7 years and then level off to an annual growth rate of 3 percent indefinitely. What is the price of this
stock today given a required return of 15 percent?
A. $7.54
B. $6.90
C.$4.47
D.$3.98
E. $8.19
8-45
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10
9. HCC, Inc., is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for
the next seven years before leveling off to 7 percent into perpetuity. The required return on the stock is 11
percent. What is the current stock price if the annual dividend per share that was just paid was $1.05?
A. $76.67
B. $64.36
C.$67.37
D.$72.11
E. $75.19
11
0. The Shore Hotel just paid a dividend of $2 per share. The company will increase its dividend by 6 percent
next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the
industry average of 2 percent dividend growth, after which the company will keep a constant growth rate
forever. What is the price of this stock today given a required return of 12 percent?
A. $21.58
B. $28.99
C.$31.83
D.$22.06
E. $26.47
8-46
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11
1. Currently, a firm has an EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8
percent annually. What is the estimated current stock price?
A. $42.89
B. $46.08
C.$41.66
D.$48.09
E.
$43.24
11
2. A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent
annually. What is the target stock price in one year?
A. $43.24
B. $42.89
C.$46.08
D.$41.66
E. $48.09
8-47
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11
3. Currently, a firm has a benchmark PE of 18.7 and an EPS of $4.18. Earnings are expected to grow 3.2
percent annually. What is the implicit stock return?
A. 3.20 percent
B. 2.89 percent
C.4.08 percent
D.3.67 percent
E. 4.23 percent
11
4. Jensen Shipping currently has an EPS of $5.29, a benchmark PE of 19.5, and an earnings growth rate of 4.3
percent. What is the target share price 4 years from now?
A. $127.32
B. $131.15
C.$138.47
D.$122.08
E. $109.42
8-48
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Chapter 08 Stock Valuation Answer Key
Multiple Choice Questions
1
. What is the model called that determines the present value of a stock based on its next annual dividend, the
dividend growth rate, and the applicable discount rate?
A. Zero growth.
B. Dividend growth.
C. Capital pricing.
D. Earnings capitalization.
E. Discounted dividend.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
2
. Which one of the following is computed by dividing next year's annual dividend by the current stock price?
A. Yield to maturity.
B. Total yield.
C. Dividend yield.
D. Capital gains yield.
E. Growth rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
8-49
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McGraw-Hill Education.
3
. Which one of following is the rate at which a stock's price is expected to appreciate?
A. Current yield.
B. Total return
C. Dividend yield.
D. Capital gains yield.
E. Coupon rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
4
. Which one of the following types of stock is defined by the fact that it receives no preferential treatment in
respect to either dividends or bankruptcy proceedings?
A. Dual class.
B. Cumulative.
C. Non-cumulative.
D. Preferred.
E. Common.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Common stock features
8-50
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McGraw-Hill Education.
5
. A company has four open seats on its board of directors. There are seven candidates vying for these four
positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will
receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate.
What is this type of voting called?
A. Democratic.
B. Cumulative.
C. Straight.
D. Deferred.
E. Proxy.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
6
. You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who
will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected
to the board. What is the type of voting called that requires this level of stock ownership to be successfully
elected?
A. Democratic.
B. Cumulative.
C. Straight.
D. Deferred.
E. Proxy.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
8-51
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McGraw-Hill Education.
7
. You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on
your behalf. What is the granting of this authority called?
A. Alternative voting.
B. Cumulative voting.
C. Straight voting.
D. Indenture voting.
E. Voting by proxy.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
8
. What are the distributions of either cash or stock to shareholders by a corporation called?
A. Coupon payments.
B. Retained earnings.
C. Dividends.
D. Capital payments.
E. Diluted profits.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Dividends and payout policy
8-52
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McGraw-Hill Education.
9
. Which one of the following is a type of equity security that has a fixed dividend and a priority status over other
equity securities?
A. Senior bond.
B. Debenture.
C. Warrant.
D. Common stock.
E. Preferred stock.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Preferred stock features
10
. Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the
general public. This sale will definitely occur in which one of the following markets?
A. Private.
B. Auction.
C.Tertiary.
D.Secondary.
E. Primary.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Primary and secondary markets
8-53
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McGraw-Hill Education.
11
. The secondary market is best defined by which one of the following?
A. Market in which subordinated shares are issued and resold.
B. Market conducted solely by brokers.
C.Market dominated by dealers.
D.Market where outstanding shares of stock are resold.
E. Market where warrants are offered and sold.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Primary and secondary markets
12
. An agent who maintains an inventory from which he or she buys and sells securities is called a:
A. Broker.
B. Trader.
C.Capitalist.
D.Principal.
E. Dealer.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Dealers and brokers
8-54
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McGraw-Hill Education.
13
. An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
A.Broker.
B. Floor trader.
C.Capitalist.
D.Principal.
E. Dealer.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Dealers and brokers
14
. The owner of a trading license for the NYSE is called a:
A. Broker.
B.Member.
C.Agent.
D.Specialist.
E. Dealer.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-55
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McGraw-Hill Education.
15
. A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):
A. Floor trader.
B. Dealer.
C.Specialist.
D.Executor.
E. Commission broker.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Dealers and brokers
16
. A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:
A. Floor trader.
B. Floor post.
C.designated market maker.
D.Floor broker.
E. Commission broker.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Dealers and brokers
8-56
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McGraw-Hill Education.
17
. A floor broker on the NYSE does which one of the following?
A. Supervises the commission brokers of a specific financial firm.
B. Trades for his or her personal inventory.
C.Executes orders on behalf of a commission broker.
D.Maintains an inventory and assumes the role of a market maker.
E. Is charged with maintaining a liquid, orderly market.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Dealers and brokers
18
. An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal
account is called a:
A.Floor trader.
B. Exchange customer.
C.Specialist.
D.Floor broker.
E. Market maker.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-57
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19
. Which one of the following is the electronic system used by the NYSE for directly transmitting orders to
specialists?
A. DMM post.
B.SuperDOT.
C.DMM.
D.SLP.
E. OrderNET.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
20
. The stream of customer orders coming in to the NYSE trading floor is called the:
A. Paper trail.
B. Trading volume.
C.Order flow.
D.Bid-ask spread.
E. Commission trail.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-58
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21
. The counter area on the floor of the NYSE where a designated market maker operates is called a:
A. Pit.
B. Hot spot.
C.Seat.
D.Post.
E. Platform.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
22
. A securities market primarily composed of dealers who buy and sell for their own inventories is referred to
which type of market?
A. Auction.
B. Private.
C.Over-the-counter.
D.Regional.
E. Insider.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-59
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McGraw-Hill Education.
23
. NASDAQ has:
A. An electronic network that transmits orders directly to the trading floor.
B. Both floor and commission brokers.
C.Three separate markets.
D.A single designated market maker for each listed stock.
E. Level 3 data available online for easy access by all investors.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
24
. National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and
is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:
A. Basically worthless as it offers no growth potential.
B. Equal in value to the present value of $1 paid one year from today.
C.Priced the same as a $1 perpetuity.
D.Valued at an assumed growth rate of 1 percent.
E. Worth $1 a share in the current market.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
8-60
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25
. A decrease in which of the following will increase the current value of a stock according to the dividend growth
model?
A. Dividend amount.
B. Number of future dividends, provided the number is less than infinite.
C.Dividend growth rate.
D.Discount rate.
E. Both the discount rate and the dividend growth rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
26
. Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75
percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on
increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of
Northern Culture has a higher ______ than the stock of Dixie South.
A. Market price.
B. Dividend yield.
C.Capital gains yield.
D.Total return.
E. Real return.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
8-61
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27
. The dividend growth model:
A. Only values stocks at Time 0.
B. Cannot be used to value constant dividend stocks.
C.Can be used to value both dividend-paying and non-dividend-paying stocks.
D.Requires the growth rate to be less than the required return.
E.
Assumes dividends increase at a decreasing rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
28
. Which one of the following applies to the dividend growth model?
A. An individual stock has the same value to every investor.
B.Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
C.Zero-growth stocks have no market value.
D.Stocks that pay the same annual dividend will have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-62
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29
. Answer this question based on the dividend growth model. If you expect the market rate of return to increase
across the board on all equity securities, then you should also expect:
A. An increase in all stock values.
B. All stock values to remain constant.
C.A decrease in all stock values.
D.Dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.
E. Dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
30
. Which one of the following statements is correct concerning the two-stage dividend growth model?
A. g1 cannot be negative.
B. Pt = Dt/ R.
C.g1 must be greater than g2.
D.g1 can be greater than R.
E. R must be less than g1 but greater than g2.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
8-63
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31
. Which one of the following statements is correct?
A. Stocks can only be assigned one dividend growth rate.
B. Preferred stocks generally have constant growth rates.
C.Dividend growth rates must be either zero or positive.
D.All stocks can be valued using the dividend discount models.
E. Stocks can have negative growth rates.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Internal and sustainable growth rates
32
. Supernormal growth is a growth rate that:
A. Is both positive and follows a year or more of negative growth.
B. Exceeds a firm's previous year's rate of growth.
C.Is generally constant for an infinite period of time.
D.Is unsustainable over the long term.
E. Applies to a single, abnormal year.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Supernormal growth stock
8-64
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33
. Which one of the following represents the capital gains yield as used in the dividend growth model?
A. D1
B. D1 / P0
C.P0
D.g
E. g / P0
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
34
. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the
following must be true?
A. The dividend must be constant.
B.The stock has a negative capital gains yield.
C.The dividend yield must be zero.
D.The required rate of return for this stock increased over the year.
E. The firm is experiencing supernormal growth.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
8-65
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35
. The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock
will:
A. Pay an increasing dividend for a period of time and then cease paying dividends altogether.
B. Increase the dividend amount every other year.
C. Pay a constant dividend for the first two quarters of each year and then increase the dividend the last two
quarters of each year.
D.Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
E. Pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then
commence paying increasing dividends for an indefinite period of time.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
36
. Which one of the following sets of dividend payments best meets the definition of two-stage growth as it
applies to the two-stage dividend growth model?
A. No dividends for five years, then increasing dividends forever
B. $1 per share annual dividend for two years, then $1.25 annual dividends forever
C.Decreasing dividends for six years followed by one final liquidating dividend payment
D. Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a
constant dividend thereafter
E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase
by 3 percent annually thereafter
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
8-66
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37
. Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?
A. Electing the board of directors.
B. Receiving a distribution of company profits.
C.Voting either for or against a proposed merger or acquisition.
D.Determining the amount of the dividend to be paid per share.
E. Having first chance to purchase any new equity shares that may be offered.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder rights
38
. Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has
a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to
elect three new directors. Which one of the following statements must be true given this information?
A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board.
B. If straight voting applies, Jen is assured a seat on the board.
C.If straight voting applies, Jen can control all of the open seats.
D.If cumulative voting applies, Jen is assured one seat on the board.
E. If cumulative voting applies, Jen can control all of the open seats.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
8-67
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39
. The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want
personal control over the firm. What is the minimum percentage of the outstanding shares one of these
shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight
voting?
A. 17 percent
B. 20 percent plus one vote
C.25 percent plus one vote
D.50 percent plus one vote
E. 51 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
40
. Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own
enough shares to personally control the elections but are determined to oust the current leadership. Likewise,
no other single shareholder owns sufficient shares to personally control the outcome of the election. Which
one of the following is the most likely outcome of this situation given that some shareholders are happy with
the existing management?
A. Negotiated settlement where each side is granted control over one of the open seats.
B. Protracted legal battle over control of the board of directors.
C.Arbitrated settlement where the arbitrator determines who will be elected to the board.
D.Control of the board decided without your influence.
E. Proxy fight for control of the board.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder voting
8-68
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McGraw-Hill Education.
41
. Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of
the following rights is most apt to be granted to the preferred shareholders?
A.Right to share in company profits prior to other shareholders.
B. Right to elect the corporate directors.
C.Right to vote on proposed mergers.
D.Right to all residual income after the common dividends have been paid.
E. Right to a permanent seat on the board of directors.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Shareholder rights
42
. Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share
of common stock. The firm has 1,000 shares of stock outstanding. The company:
A. Must always show a current liability of $2,400, ($2.40 ×1,000), for dividends payable.
B.Must still declare each dividend before it becomes an actual company liability.
C.Is obligated to pay $2.40 per share each year in perpetuity.
D.Will be declared in default if it does not pay at least $2.40 per share per year on a timely basis.
E. Has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Dividends and payout policy
8-69
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43
. Which one of the following statements related to corporate dividends is correct?
A. Dividends are nontaxable income to shareholders.
B. Dividends reduce the taxable income of the corporation.
C.The chief executive officer of a corporation is responsible for declaring dividends.
D.The chief financial officer of a corporation determines the amount of dividend to be paid.
E. Corporate shareholders may receive a tax break on a portion of their dividend income.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Dividends and payout policy
44
. Which one of these statements related to preferred stock is correct?
A. Preferred shareholders normally receive one vote per share of stock owned.
B. Preferred shareholders determine the outcome of any election that involves a proxy fight.
C.Preferred shareholders are considered to be the residual owners of a corporation.
D.Preferred stock normally has a stated liquidating value of $1,000 per share.
E. Cumulative preferred shares are more valuable than comparable noncumulative shares.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Preferred stock features
8-70
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45
. You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently
suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been
arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred
shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next
dividend is paid.
A. 0
B. 1
C.2
D.3
E. Either 1, 2, or 3
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Preferred stock features
46
. Preferred stock may have all of the following characteristics in common with bonds with the exception of:
A. The lack of voting rights.
B. A possible conversion option into common stock.
C.Annuity payments.
D.A fixed liquidation value.
E. Tax-deductible payments.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.2 Some Features of Common and Preferred Stocks
Topic: Preferred stock features
8-71
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47
. NYSE designated market makers:
A. Execute trades on behalf of their clients.
B. Are guaranteed a profit on every stock purchased and resold.
C.Act as dealers.
D.Provide a one-sided market.
E. Are also referred to as "$2 brokers.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
48
. Which one of the following statements related to the NYSE is correct?
A.Exchange members must purchase trading licenses.
B. NYSE shareholders currently own "seats" on the exchange.
C.DMM's buy at the asked price.
D.The NYSE is privately owned by an investment firm.
E. Electronic trading has increased the demand for floor brokers.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-72
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49
. Which one of the following transactions occurs in the primary market?
A. Purchase of 500 shares of GE stock from a current shareholder.
B. Gift of 100 shares of stock to a charitable organization.
C.Gift of 200 shares of stock by a mother to her daughter.
D.A purchase of newly issued stock from ATamp;T.
E. IBM's purchase of GE stock from a dealer.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Primary and secondary markets
50
. Which one of the following statements applies to NASDAQ?
A. Composed of four separate markets.
B. Exchange floor located in Chicago.
C.Provides two levels of information access.
D.DMM system.
E. Multiple market maker system.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-73
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51
. Which one of the following best describes NASDAQ?
A. Dealer price at which they will buy is listed as the asked price.
B. Market where the DMM’s are located at posts.
C.Computer network of securities dealers.
D.Market with three physical trading floors.
E.
Largest U.S. stock market in terms of dollar trading volume.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
52
. Who can access Level 3 of NASDAQ’s information?
A. Only NASDAQ regulators.
B. Customers who pay an access fee.
C.NASDAQ market makers.
D.There is no Level 3.
E.
Anyone with internet access.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 08-04 How the stock markets work.
Section: 8.3 The Stock Markets
Topic: Stock exchanges
8-74
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53
. A forward PE is based on:
A. the last dividend payment multiplied by 2.
B. historical earnings. .
C.estimated future earnings.
D.industry averages.
E.
the last four quarterly dividend payments.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
54
. The typical range for the price-sales ratio is ___ but younger, faster-growing firms may have ratios that are
much _____.
A. 1.8 - 2.5; lower
B. 2.0 - 3.5; lower
C..5 - 1.5; higher
D.
.8 - 2.0; higher
E.
1.8 - 3.0; higher
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
8-75
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55
. Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced
that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how
much are you willing to pay to purchase one share of this stock today?
A. $18.23
B.$16.00
C.$16.67
D.$17.68
E. $15.57
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
56
. Dee's made two announcements concerning its common stock today. First, the company announced that the
next annual dividend will be $1.94 a share. Secondly, all dividends after that will decrease by 1.25 percent
annually. What is the value of this stock at a discount rate of 14.5 percent?
A.$12.32
B. $12.10
C.$14.82
D.$14.51
E. $14.21
P0 = [$1.94 ×(1 + (-.0125))] / (.145 - (-.0125)) = $12.32
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-76
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57
. How much are you willing to pay for one share of LBM stock if the company just paid a $1.23 annual dividend,
the dividends increase by 3.1 percent annually, and you require a return of 16 percent?
A. $9.29
B. $9.33
C.$9.83
D.$10.21
E. $9.59
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
58
. Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to
increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of
return is 15 percent?
A. $25.06
B. $26.30
C.$24.56
D.$26.94
E. $27.59
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-77
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McGraw-Hill Education.
59
. Yummy Bakery just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2
percent per year. If you are planning to buy 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 14 percent at the time of your purchase?
A. $19.89
B. $18.16
C.$18.83
D.$19.47
E. $20.20
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
60
. The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has
promised to maintain a constant dividend even though economic times are tough. How much are you willing to
pay for one share of this stock if you want to earn a 13.6 percent annual return?
A.$13.53
B. $14.01
C.$14.56
D.$13.79
E. $13.28
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
8-78
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61
. GEO Inc. has paid annual dividends of $.41, $.47, and $.52 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 flat. Given the lack of future growth, you will only buy this stock if you can
earn at least a rate of return of 16 percent. What is the maximum amount you are willing to pay for one share
of this stock today?
A. $2.85
B.$3.25
C.$2.43
D.$3.09
E. $3.18
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
62
. The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share
next year when the annual dividend is distributed. The firm has established a pattern of increasing its
dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this
stock?
A. 7.59 percent
B.7.43 percent
C.7.67 percent
D.7.14 percent
E. 7.28 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
8-79
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McGraw-Hill Education.
63
. The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual
dividend and announced plans to pay $1.27 next year. The dividend growth rate is expected to remain
constant at the current level. What is the required rate of return on this stock?
A.5.14 percent
B. 5.82 percent
C.6.08 percent
D.6.39 percent
E. 6.75 percent
R = .0189 + [($1.27 - 1.23) / $1.23] = .0514, or 5.14 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
64
. Southern Markets recently paid a $2.80 annual dividend on its common stock. This dividend increases at an
average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate
of return?
A. 13.88 percent
B. 14.07 percent
C.14.21 percent
D.14.37 percent
E. 14.60 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
8-80
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
65
. The Uptowner will pay an annual dividend of $1.98 a share next year with future dividends increasing by 2.8
percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?
A. 6.55 percent
B. 7.13 percent
C.7.46 percent
D.6.83 percent
E. 8.29 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
66
. Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was
$2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?
A. 16.66 percent
B. 16.48 percent
C.13.35 percent
D.14.20 percent
E. 12.46 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
8-81
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McGraw-Hill Education.
67
. Gee-Gee common stock returned a nifty 21.6 percent rate of return last year. The dividend amount was $.25 a
share which equated to a dividend yield of 1.01 percent. What was the rate of price appreciation for the year?
A.20.59 percent
B. 21.38 percent
C.23.60 percent
D.22.87 percent
E. 21.52 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock returns and yields
68
. Roy's Welding common stock sells for $48.96 a share and pays an annual dividend that increases by 2.5
percent annually. The market rate of return on this stock is 14.6 percent. What is the amount of the last
dividend paid?
A. $4.80
B. $5.86
C.$5.78
D.$4.98
E. $5.64
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-82
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McGraw-Hill Education.
69
. Flo's Flowers pays an annual dividend that is expected to increase by 2.1 percent per year. The stock
commands a market rate of return of 13.8 percent and sells for $19.06 a share. What is the expected amount
of the next dividend?
A. $2.03
B.$2.23
C.$2.37
D.$2.32
E. $2.28
$19.06 = D1 / (.138 - .021) D1 = $2.23
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
70
. The Garden Shoppe has adopted a policy of increasing the annual dividend on its common stock at a
constant rate of 1.65 percent annually. The firm just paid an annual dividend of $1.84. What will the dividend
be eight years from now?
A. $1.88
B. $1.92
C.$2.10
D.$2.02
E. $2.15
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividends and payout policy
8-83
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
71
. A stock pays a constant annual dividend and sells for $56.07 a share. If the market rate of return on this stock
is 12.2 percent, what is the amount of the next annual dividend?
A. $5.67
B. $5.94
C.$6.21
D.$6.84
E. $7.30
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Zero-growth stock
72
. You want to purchase some shares of JJ Farms stock but need a 14.5 percent rate of return to compensate
for the perceived risk. What is the maximum you are willing to spend per share to buy this stock if the
company pays a constant $1.25 annual dividend per share?
A. $9.11
B.$8.62
C.$9.26
D.$9.38
E. $8.47
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Zero-growth stock
8-84
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McGraw-Hill Education.
73
. Home Products common stock sells for $18.31 a share and has a market rate of return of 12.8 percent. The
company just paid an annual dividend of $1.42 per share. What is the dividend growth rate?
A. 5.27 percent
B. 4.45 percent
C.5.01 percent
D.4.29 percent
E. 4.68 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
74
. Gee-Gee's is going to pay an annual dividend of $2.05 a share on its common stock next year. This year, the
company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy.
What will one share of this common stock be worth five years from now if the applicable discount rate is 10.9
percent?
A. $26.94
B. $28.30
C.$26.28
D.$27.61
E. $27.00
g = ($2.05 - 2) / $2 = .025 P5 = [$2.05 ×(1 + .025)5] / (.109 - .025) = $27.61
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
8-85
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
75
. The UpTowner just paid a $3.45 annual dividend. The company has a policy of increasing the dividend by 4.5
percent 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 four years. If you require a 14.8 percent rate of return, how much will you be
willing to pay per share for the 100 shares when you can afford to make this investment?
A. $42.50
B.$41.74
C.$43.12
D.$38.78
E. $44.47
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
76
. Global Logistics just announced it is increasing its annual dividend to $1.68 next year and establishing a
policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this
stock be worth ten years from now if the required rate of return is 13.5 percent?
A.$22.57
B. $21.68
C.$26.51
D.$27.02
E. $27.37
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-86
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McGraw-Hill Education.
77
. Hot Teas common stock is currently selling for $41.04. The last annual dividend paid was $1.31 per share and
the market rate of return is 11.2 percent. At what rate is the dividend growing?
A.7.76 percent
B. 6.67 percent
C.8.42 percent
D.8.60 percent
E. 6.10 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Internal and sustainable growth rates
78
. Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual
dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per
year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of
one share of this stock if the required rate of return is 15.5 percent?
A. $1.82
B. $2.04
C.$2.49
D.$2.71
E. $3.05
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
8-87
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McGraw-Hill Education.
79
. Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying
$1.55, $1.63, and $1.65 a share over the next three years, respectively. After that, the dividend will be
constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11
percent?
A. $13.98
B. $14.07
C.$15.23
D.$17.16
E. $13.10
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
80
. KNJ Companies is preparing to pay dividends of $.52, $.60, and $.75 a share over the next three years,
respectively. After that, the annual dividend will be $1.10 per share indefinitely. What is this stock worth to you
per share if you require a return of 9.8 percent?
A. $6.67
B. $8.21
C.$10.02
D.$11.47
E. $12.03
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
8-88
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McGraw-Hill Education.
81
. Distant Groves announced today that it will begin paying annual dividends next year. Dividends for the first
three years will be $.15, $.20, and $.25 a share, respectively. After that, dividends are projected to increase by
4 percent per year. What is one share of this stock worth today at a required return of 8.5 percent?
A. $5.17
B. $4.94
C.$5.03
D.$4.55
E. $4.86
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
82
. Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and
$4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to
increase by 3.25 percent annually. What is one share of this stock worth to you today if you require a 12.5
percent rate of return on similar investments?
A.$42.92
B. $43.40
C.$45.12
D.$45.88
E. $46.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
8-89
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McGraw-Hill Education.
83
. The Sly Fox pays a constant dividend of $1.46 a share. The company announced today that it will continue to
pay the dividend for another two years and then in year 3 it will pay a final liquidating dividend of $15.25 a
share. What is one share of this stock worth today at a required return of 18.5%?
A. $12.92
B.$11.44
C.$12.07
D.$13.09
E. $14.20
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
84
. New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per
share for two years. After that, the company plans on paying a constant $.75 a share annual dividend
indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8
percent?
A. $3.78
B.$3.56
C.$4.37
D.$4.71
E. $4.98
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
8-90
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McGraw-Hill Education.
85
. Sweatshirts Ltd. is downsizing. The company paid a $3.80 annual dividend last year and has announced
plans to lower the dividend by 30 percent each year. Once the dividend amount becomes zero, the company
will go out of business. You have a required rate of return of 18 percent on this particular stock given the
company's situation. What are your shares in this firm worth today on a per share basis?
A.$5.54
B. $6.91
C.$3.68
D.$1.29
E. $2.11
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
86
. DT Motors paid its first annual dividend yesterday in the amount of $.15 a share. The company plans to
double the dividend in each of the next 3 years. Starting in year 4, the firm plans to pay $1.50 a share
indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.2
percent?
A. $11.02
B. $10.77
C.$11.37
D.$10.26
E. $11.79
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
8-91
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McGraw-Hill Education.
87
. Sew ‘N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45,
$1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at
$1.60 per share. What is this stock worth today at a discount rate of 9 percent?
A. $17.08
B. $16.30
C.$16.67
D.$16.79
E. $17.50
P3 = $1.60 / .09 = $17.78 P0 = $1.45 / (1 + .09) + $1.50 / (1 + .09)2 + ($1.53 + 17.78) / (1 + .09)3
P0 = $17.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
88
. Home Parties is paying an annual dividend of $1.25 every other year. The last dividend was paid last year.
The firm will continue this policy until two more dividend payments have been paid. One year after the last
normal dividend payment, the company plans to pay a final liquidating dividend of $25 per share. What is the
current market value of this stock if the required return is 17 percent?
A. $18.92
B.$15.19
C.$13.16
D.$17.14
E. $17.53
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
8-92
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McGraw-Hill Education.
89
. Next year, Jensen's will pay an annual dividend of $2.75 per share. The company has been reducing the
dividends by 10 percent annually. How much are you willing to pay today to purchase stock in this company if
your required rate of return is 11.5 percent?
A. $11.92
B. $17.87
C.$12.79
D.18.33
E. $16.50
P0 = $2.75 / (.115 + .10) = $12.79
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
90
. Kay's Sewing Loft 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 percent a year for the next
two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid a $3
dividend per share. What is the market value of this stock if the required rate of return is 12.5 percent?
A. $14.63
B.$16.96
C.$18.08
D.$19.61
E. $18.84
P2 = $2 / .125 = $16 P0 = [$3 ×(1 - .10)] / (1 + .125) + {[$3 ×(1 - .10)2] + 16} / (1 + .125)2 = $16.96
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
8-93
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
91
. Your local toy store just announced that it will pay a $4 dividend next year, $3 the following year, and then a
final liquidating dividend of $46 a share in year 3. At a discount rate of 14 percent, what should one share sell
for today?
A. $46.21
B. $47.48
C.$45.64
D.$39.09
E. $36.87
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
92
. J&J Foods wants to issue some 6.5 percent preferred stock that has a stated liquidating value of $100 a
share. The company has determined that stocks with similar characteristics provide a return of 9.5 percent.
What should the offer price be?
A. $77.26
B. $71.38
C.$64.20
D.$68.42
E. $62.60
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
8-94
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McGraw-Hill Education.
93
. A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What is the rate of return on
this security?
A. 9.38 percent
B. 9.63 percent
C.11.52 percent
D.10.72 percent
E. 11.84 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
94
. A preferred stock sells for $54.45 a share and provides a return of 9.826 percent. What is the amount of the
dividend per share?
A. $5.45
B. $5.25
C.$5.35
D.$5.60
E. $5.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
8-95
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McGraw-Hill Education.
95
. A preferred stock pays a $4.50 annual dividend. What is the maximum price you are willing to pay for one
share of this stock today if your required return is 8.5 percent?
A. $41.47
B. $35.48
C.$38.25
D.$52.94
E. $57.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
96
. The Grist Mill just paid a dividend of $1.46 per share on its stock. The dividends are expected to grow at a
constant rate of 3.5 percent per year, indefinitely. What will the price of this stock be in 5 years if investors
require an annual return of 15 percent?
A. $15.08
B. $15.24
C.$15.83
D.$15.61
E. $15.33
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 8-01
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-96
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McGraw-Hill Education.
97
. The next dividend payment by HG Enterprises will be $2.35 per share. The dividends are anticipated to
maintain a 2.5 percent growth rate forever. The stock currently sells for $54.60 per share. What is the dividend
yield?
A. 4.20 percent
B.4.30 percent
C.4.81 percent
D.4.50 percent
E. 4.41 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 8-03
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
98
. AC Electric just paid a $2.10 per share annual dividend. The firm pledges to increase its dividend by 2.4
percent for the next five years and then maintain a constant 2 percent rate of dividend growth. If the required
return is 15 percent, what is the current value of one share of this stock?
A. $25.07
B. $23.09
C.$22.22
D.$18.47
E. $16.74
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-24
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
8-97
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McGraw-Hill Education.
99
. Suppose you know a company's stock currently sells for $85 per share and the required return is 10 percent.
You also know that the total return on the stock is evenly divided between the capital gains yield and the
dividend yield. What is the current dividend per share if it's the company's policy to always maintain a constant
growth rate in its dividends?
A. $4.25
B.$4.05
C.$4.37
D.$4.50
E. $4.64
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 8-06
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock dividends
10
0. Whistle Stop pays a constant annual $8 dividend on its stock. The company will maintain this dividend for the
next eight years and will then cease paying dividends forever. What is the current price per share if the
required return on this stock is 12.6 percent?
A. $37.78
B. $42.48
C.$38.92
D.$36.67
E. $63.49
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 8-07
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
8-98
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10
1. Morris Companies has an issue of preferred stock outstanding that pays a $7.75 dividend every year in
perpetuity. What is the required return if this issue currently sells for $68.19 per share?
A.11.37 percent
B. 11.72 percent
C.11.80 percent
D.11.86 percent
E. 10.95 percent
AACSB: Analytic
Blooms: Apply
Difficulty: Basic
EOC: 8-06
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
10
2. Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 15 years, because
the firm needs to plow back its earnings to fuel growth. The company plans to pay a $6 per share dividend in
16 years and will increase the dividend by 4 percent per year thereafter. What is the current share price if the
required return on this stock is 16 percent?
A.$5.40
B. $5.62
C.$8.59
D.$50.00
E. $52.00
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
8-99
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10
3. Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has
announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay
another dividend. How much are you willing to pay per share today to buy this stock if you require a 10
percent return?
A. $27.08
B. $24.15
C.$26.57
D.$32.60
E. $33.33
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-16
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Dividend discount model
10
4. K's Fashions is growing quickly. Dividends are expected to increase by 15 percent annually for the next three
years, with the growth rate falling off to a constant 5 percent thereafter. The required return is 16 percent and
the company just paid a $3.80 annual dividend. What is the current share price?
A. $28.96
B. $31.11
C.$46.55
D.$48.87
E. $52.20
P3 = [$3.80 ×(1 + .15)3 ×(1 + .05] / (.16 - .05) = $55.17 P0 = [$3.80 × (1 + .15)] / (.16 - .15) × {1 [(1 + .15) / (1 + .16)]3} + $55.17 / (1 + .16)3 = $46.55
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-25
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
8-100
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
10
5. Timber Co. is a mature manufacturing firm. The company just paid a $5.40 annual dividend and
management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to
pay today per share to buy this stock if you require a return of 14.5 percent?
A. $34.79
B.$20.91
C.$18.27
D.$89.35
E. $98.18
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-20
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
10
6. Farm Machinery stock currently sells for $65 per share. The market requires a return of 14 percent while the
company maintains a constant 8 percent growth rate in dividends. What was the most recent annual dividend
per share paid on this stock?
A. $3.00
B.$3.61
C.$3.67
D.$3.75
E. $3.91
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-21
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Constant-growth stock
8-101
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10
7. Electric Utilities just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity
beginning 10 years from now. What is one share of this stock worth today if the market requires a return of 9
percent on this investment?
A.$102.32
B. $104.16
C.$109.08
D.$141.41
E. $151.43
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-22
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Preferred stock features
10
8. Farmco just paid a dividend of $.20 per share. The dividends are expected to grow at 20 percent annually for
the next 7 years and then level off to an annual growth rate of 3 percent indefinitely. What is the price of this
stock today given a required return of 15 percent?
A. $7.54
B. $6.90
C.$4.47
D.$3.98
E. $8.19
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-24
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
8-102
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10
9. HCC, Inc., is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for
the next seven years before leveling off to 7 percent into perpetuity. The required return on the stock is 11
percent. What is the current stock price if the annual dividend per share that was just paid was $1.05?
A.$76.67
B. $64.36
C.$67.37
D.$72.11
E. $75.19
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 8-25
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
Topic: Two-stage growth stock
11
0. The Shore Hotel just paid a dividend of $2 per share. The company will increase its dividend by 6 percent
next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the
industry average of 2 percent dividend growth, after which the company will keep a constant growth rate
forever. What is the price of this stock today given a required return of 12 percent?
A.$21.58
B. $28.99
C.$31.83
D.$22.06
E. $26.47
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Section: 8.1 Common Stock Valuation
8-103
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11
1. Currently, a firm has an EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8
percent annually. What is the estimated current stock price?
A. $42.89
B. $46.08
C.$41.66
D.$48.09
E.
$43.24
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
EOC: 8-26
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
Topic: Nonconstant-growth stock
11
2. A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent
annually. What is the target stock price in one year?
A.$43.24
B. $42.89
C.$46.08
D.$41.66
E. $48.09
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
EOC: 8-29
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
8-104
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11
3. Currently, a firm has a benchmark PE of 18.7 and an EPS of $4.18. Earnings are expected to grow 3.2
percent annually. What is the implicit stock return?
A.3.20 percent
B. 2.89 percent
C.4.08 percent
D.3.67 percent
E. 4.23 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
EOC: 8-26
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
11
4. Jensen Shipping currently has an EPS of $5.29, a benchmark PE of 19.5, and an earnings growth rate of 4.3
percent. What is the target share price 4 years from now?
A. $127.32
B. $131.15
C.$138.47
D.$122.08
E. $109.42
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
EOC: 8-29
Learning Objective: 08-02 How to value stocks using multiples.
Section: 8.1 Common Stock Valuation
Topic: Stock valuation using multiples
8-105
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.