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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. 8-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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. 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. 8-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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. 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. 8-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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. 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. 8-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 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 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 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 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 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 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 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 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 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 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 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 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 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.