Question 1

Preferred stock is never callable.

Accepted Answer

Preferred stock can be callable, which means the issuing company has the right to repurchase the stock at a predetermined price after a certain date.

Question 2

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%.

Accepted Answer

The current yield is not 17.5%; the P/E (Price to Earnings) ratio is 17.5. The current yield is calculated by dividing the annual dividend by the current stock price, which would be $0.80 / $33.10 = 0.0242 or 2.42%, not 17.5%.

Question 3

All preferred stock has an obligatory sinking fund.

Accepted Answer

Not all preferred stocks have an obligatory sinking fund; it is a feature specific to certain issues and is not a universal characteristic of preferred stock. A sinking fund is a means for a company to pay off part of their debt over time, but not all preferred stocks are issued with this requirement.

Question 4

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.

Accepted Answer

To calculate the expected price for 100 shares in three years, we first need to find the future dividends and then discount them back to their present value at the desired rate of return. The dividend in three years (D3) can be calculated using the formula for the future value of the dividend, which is D0 * (1 + g)^n, where D0 is the current dividend, g is the growth rate, and n is the number of years. Here, D0 = $1.20, g = 2.5% or 0.025, and n = 3. So, D3 = $1.20 * (1 + 0.025)^3 = $1.20 * 1.077 = $1.2925. The dividend in the fourth year (D4), which is the first dividend you expect to receive after buying the stock, would be D3 * (1 + g) = $1.2925 * 1.025 = $1.3248. The price of the stock when you buy it should be the present value of all future dividends, but since the dividends grow at a constant rate, we can use the Gordon Growth Model (also known as the Dividend Discount Model for a perpetuity with growth) to find the price at the end of year 3 (P3). The model is P = D / (r - g), where D is the dividend received at the end of the first period from the present moment (in this case, D4), r is the desired rate of return, and g is the growth rate. Thus, P3 = $1.3248 / (0.10 - 0.025) = $1.3248 / 0.075 = $17.664. For 100 shares, the expected price would be 100 * $17.664 = $1,766.4, which rounds to $1,766, making option D the correct answer.

Question 5

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%.

Accepted Answer

The closing price on the previous trading day was $33.60 (since there was a net change of -.50, indicating the price dropped from the previous day). The current yield is calculated as the annual dividend divided by the current price, which is $0.80 / $33.10 = 0.0242 or 2.42%, not 17.5%. The P/E (Price to Earnings ratio) of 17.5 is unrelated to the current yield calculation.

Question 6

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.

Accepted Answer

In a liquidation, preferred stockholders are entitled to receive the par value of their shares before common stockholders receive anything, assuming there are sufficient funds. Since the par value is given as $100, each share of 5% preferred stock would be entitled to a liquidation payment of $100.

Question 7

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?

Accepted Answer

The dividend will be $1.10 * (1 + 0.0375)^5 = $1.32 in five years.

Question 8

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?

Accepted Answer

The expected amount of the next dividend can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a constantly growing dividend), which is given by P = D0(1 + g) / (r - g), where P is the current stock price, D0 is the most recent dividend paid, g is the growth rate of the dividend, and r is the required rate of return (market rate of return in this case). Rearranging the formula to solve for D0 gives us D0 = P(r - g) / (1 + g). We are given P = $60.50, r = 12% or 0.12, and g = 10% or 0.10. However, we are asked for the expected amount of the next dividend, which is D1 = D0(1 + g). We don't have D0 directly, but we can solve for D1 directly by using the formula P = D1 / (r - g), which gives D1 = P * (r - g). Substituting the given values gives D1 = $60.50 * (0.12 - 0.10) = $60.50 * 0.02 = $1.21.

Question 9

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?

Accepted Answer

The current dividend can be calculated using the yield percentage (Yld%) and the last price of the stock. The formula is: Dividend = Last Price * (Yield / 100). Plugging in the values: $36.19 * (1.3 / 100) = $0.47047, which rounds to $0.47.

Question 10

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.

Accepted Answer

The answer of If a company has a current stock...

Question 11

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

Accepted Answer

The answer of  For the current year, the expected...

Question 12

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%?

Accepted Answer

The answer of Winter Green Decors announced today that it...

Question 13

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.

Accepted Answer

To find the stock price in year 2, calculate the dividends for the first few years and the terminal value at year 2. The dividends are: D1 = $6 * 1.25 = $7.50, D2 = $7.50 * 1.20 = $9.00. The terminal value at year 2 is D3 / (r - g) = ($9.00 * 1.10) / (0.10 - 0.03) = $141.43. The stock price in year 2 is the present value of D3 and the terminal value, discounted back to year 2: ($9.90 + $141.43) / (1.10)^2 = $100.64.

Question 14

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

Accepted Answer

The price-earnings (P/E) ratio for stocks, including those listed on the Toronto Stock Exchange (TSX) and reported in The National Post or other financial publications, is typically based on the company's earnings per share (EPS) for the past twelve months, known as trailing P/E.

Question 15

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%?

Accepted Answer

Using the dividend discount model:

Current Price = Dividend ÷ (Discount Rate - Dividend Growth Rate)

Current Price = $1.00 ÷ (0.14 - 0.05)

Current Price = $1.00 ÷ 0.09

Current Price = $11.11

Therefore, the price of one share of this stock today is $11.11. The correct answer choice is D.

Question 16

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

Accepted Answer

The partial excludability of dividend income from taxable income actually makes preferred stock more desirable to purchasers, as it can lead to a lower effective tax rate on the income received from such investments.

Question 17

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

Accepted Answer

For cumulative preferred stock, any missed dividend payments must be paid in full before any dividends can be distributed to common shareholders.

Question 18

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?

Accepted Answer

The dividend discount model (DDM) formula is used: Price = Dividend / (Rate of return - Growth rate). Plugging in the values: $22 = Dividend / (0.082 - 0.038). Solving for the Dividend gives approximately $0.93.

Question 19

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?

Accepted Answer

The dividend in six years can be calculated using the formula for the future value of an investment with compound interest: $P(1 + r)^n$, where $P$ is the principal amount ($0.90), $r$ is the annual rate (3% or 0.03), and $n$ is the number of years (6). Plugging in the values gives: $0.90(1 + 0.03)^6 = 0.90(1.194052)$, which equals approximately $1.07465, rounding to $1.11.

Question 20

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?

Accepted Answer

To find the dividend 7 years from now, use the formula for future value of a growing annuity: Future Dividend = Last Dividend * (1 + growth rate)^number of years. Here, it is $1.21 * (1 + 0.035)^7 = $1.54.

Quiz 8: Stock Valuation