Question 1

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

Using the Gordon growth model:
D1 = D0 × (1 + g)
D1 = $2.20 × (1 + 6%) = $2.44

Question 2

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 0.75 \
\mathrm{r}_{\mathrm{s}} & 10.5 \% \
\mathrm{~g} & 6.4 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 18.29
\end{array}$

Question 3

The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

Accepted Answer

The answer of The Francis Company is expected to pay...

Question 4

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 4.7 \% \
\mathrm{P}_{0} & \$ 26.00 \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}= & 4.81 \%
\end{array}$

Question 5

Gay Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Accepted Answer

The answer of Gay Manufacturing is expected to pay a...

Question 6

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Accepted Answer

The answer of A share of common stock just paid...

Question 7

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Accepted Answer

The answer of Schnusenberg Corporation just paid a dividend of...

Question 8

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

Using the Gordon growth model, we can calculate the expected dividend for the coming year:

D1 = D0 * (1 + g) = $2.25 * (1 + 0.035) = $2.33

Then, we can calculate the dividend yield as:

Dividend yield = D1 / P0 = $2.33 / $50 = 0.0466 = 4.66%

Therefore, the answer is B, 4.66%.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. Option A is incorrect because under certain state charters, different classes of common stock may have different voting rights. Option B is incorrect because the right to approve or disapprove a merger is typically given to shareholders as a whole, not just those with preemptive rights. Option D is incorrect because the formula can be used for firms with negative growth rates, but it will result in a negative stock price. Option E is incorrect because the formula can be used for any growth rate, as long as it is less than the required return.

Question 10

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.50 \
\mathrm{r}_{\mathrm{s}} & 10.1 \% \
\mathrm{~g} & 4.0 \% \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.56 \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 25.57
\end{array}$

Question 11

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Accepted Answer

The answer of Goode Inc.'s stock has a required rate...

Question 12

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.25 \
\mathrm{~g} & 5.5 \% \
\mathrm{P}_{0} & \$ 44.00 \
\text { Total return }=r_{\mathrm{S}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 8.34 \%
\end{array}$

Question 13

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Accepted Answer

The answer of Whited Inc.'s stock currently sells for $35.25...

Question 14

Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Accepted Answer

The answer of Reddick Enterprises' stock currently sells for $35.50...

Question 15

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Accepted Answer

The answer of Stocks A and B have the following...

Question 16

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

Accepted Answer

The answer of The Isberg Company just paid a dividend...

Question 17

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 1.50 \
\mathrm{~g} & 6.5 \% \
\mathrm{P}_{0} & \$ 56.00 \
\text { Capital gains yield }=\mathrm{g}= & 6.50 \%
\end{array}$

Question 18

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Accepted Answer

According to the Gordon Growth Model, a stock's required return can be broken down into two components: its expected dividend yield and its expected growth rate. Therefore, if Stock Y has a lower expected dividend yield but a higher required return than Stock X, it must have a higher expected growth rate to compensate for the lower dividend yield.

Question 19

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{0} & \$ 1.75 \
\mathrm{~g} & 3.6 \% \
\mathrm{P}_{0} & \$ 32.00 \
\mathrm{D}_{1}=\mathrm{D}_{0}(1+\mathrm{g})= & \$ 1.81 \
\text { Total return }=\mathrm{r}_{\mathrm{s}}=\mathrm{D}_{1} / \mathrm{P}_{0}+\mathrm{g} & 9.27 \%
\end{array}$

Question 20

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Accepted Answer

The answer of Molen Inc. has an outstanding issue of...

Quiz 7: Stocks, Stock Valuation, and Stock Market Equilibrium