Deck 8: Stock Valuation

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Dividends received by both individuals and corporations are fully taxable.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

The stockholders determine the amount of dividend to be paid.

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Dividends are a tax deductible expense.

Question 36

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

Question 37

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

Question 38

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

Question 39

Most preferred stocks have dividends that are cumulative.

Question 40

Preferred stock has a stated liquidation value.

Question 41

Preferred stock is never callable.

Question 42

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

Question 43

All preferred stock has an obligatory sinking fund.

Question 44

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

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

Question 45

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

Question 46

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

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

Question 47

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

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

Question 48

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

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

Question 49

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

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

Question 50

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

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

Question 51

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

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

Question 52

Winter Green Decors announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.40 a share. The following dividends will be $.60, $.85, and $1.00 a share annually for the following 3 years, respectively. After that, dividends are projected to increase by 2% per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 10%?

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

Question 53

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

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

Question 54

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

Question 55

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

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

Question 56

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

Question 57

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

Question 58

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

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

Question 59

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

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

Question 60

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

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

Question 61

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

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

Question 62

If a company has a current stock price of $60, an EPS of $2.50/share; EPS growth rate of 20% and the investors rate of return is 18%, calculate the cash cow price.

A) $13.09
B) $13.49
C) $13.89
D) $14.29
E) $14.69

Question 63

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

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

Question 64

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

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

Question 65

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

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

Question 66

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

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

Question 67

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

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

Question 68

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

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

Question 69

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

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

Question 70

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

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

Question 71

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

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

Question 72

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

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

Question 73

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

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

Question 74

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

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

Question 75

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

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

Question 76

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

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

Question 77

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

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

Question 78

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

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

Question 79

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

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

Question 80

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

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