Question 1

Merrell Enterprises's stock has an expected return of 14% The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share Which of the following statements is CORRECT?

Accepted Answer

The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. So, the current dividend per share is $50 * 8% = $4.00. The stock's dividend yield is $4.00 / $50 = 8%. The stock price is expected to be $50 * (1 + 8%) = $54 a share one year from now.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

Preferred stock is generally considered less risky than common stock because of its fixed dividend payment. As a result, the expected after-tax yield on preferred stock is usually lower than the after-tax expected return on common stock.

Question 3

50 per share is the current price for Foster Farms' stockThe 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 expected price of the stock in 3 years can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is P3 = P0 * (1 + g)^3, where P0 is the current price, g is the growth rate, and 3 is the number of years. Substituting the given values: P3 = $50 * (1 + 0.055)^3 = $50 * 1.174 = $58.70. However, this is not directly matching any of the options, indicating a possible miscalculation or misinterpretation in the options provided. The closest option based on typical calculations would be E) $41.69, assuming a different interpretation or error in the problem setup.

Question 4

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) 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

$\begin{array}{lr}
\text { Expected dividend }\left(\mathrm{D}_{1}\right) & \$ 1.25 \
\text { Stock price } & \$ 32.50 \
\text { Required return } & 10.5 \% \
\text { Dividend yield } & 3.85 \% \
\text { Growth rate }=r_{\mathrm{S}}-\mathrm{D}_{1} / \mathrm{P}_{0}= & 6.65 \%
\end{array}$

Question 5

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return Which of the following statements is CORRECT?

Accepted Answer

Given that Stock A has a higher required rate of return but both stocks have the same price and are in equilibrium, if Stock A has a lower dividend yield than Stock B, it must compensate with a higher expected capital gains yield to meet its higher required rate of return.

Question 6

constant growth stocks are in equilibrium, have the same price, and have the same required rate of return Which of the following statements is CORRECT?

Accepted Answer

If two stocks are in equilibrium with the same price and required rate of return, a higher dividend yield for one stock implies a lower dividend growth rate to maintain the same total return.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

Preferred stock is generally less risky than common stock because it has a fixed dividend rate and priority over common stockholders in the event of bankruptcy or liquidation.

Question 8

stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00 The dividend is expected to decline at a rate of 5% a year forever (g = -5%) If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Accepted Answer

The constant growth model can be used to value the stock even though the growth rate is negative. The expected capital gains yield is equal to the expected rate of return minus the dividend yield. The dividend yield 5 years from now is expected to be 10%. The current stock price is $20.

Question 9

preemptive right is important to shareholders because it

Accepted Answer

Preemptive right allows current shareholders the right to maintain their ownership percentage in the company by buying additional shares before they are sold to the public. This protects them from dilution of their ownership interests.

Question 10

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

The answer of stock just paid a dividend of D0...

Question 11

in analyzing a stock, find that its expected return exceeds its required returnThis suggests that you think

Accepted Answer

If the expected return of a stock exceeds its required return, that means the stock is undervalued by the market and is likely to have a potential for capital appreciation. Therefore, the stock could be a good buy.

Question 12

share of Lash Inc.'s 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 share of Lash Inc.'s common stock just...

Question 13

markets are in equilibrium, which of the following conditions will exist?

Accepted Answer

In a market equilibrium, the expected return on each stock should equal its required return, as perceived by the marginal investor. This is because if a stock's expected return is higher than its required return, investors will rush to buy it, driving its price up and its expected return down. Conversely, if a stock's expected return is lower than its required return, investors will rush to sell it, driving its price down and its expected return up. Thus, in equilibrium, each stock's expected return should match its required return, ensuring that the market is efficiently pricing securities.

Question 14

Kelly Enterprises'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 Kelly Enterprises's stock currently sells for $35.25...

Question 15

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

The answer of D1 = $1.25, g (which is constant)...

Question 16

Which of the following statements is CORRECT?

Accepted Answer

The constant growth model (Gordon Growth Model) considers both the dividend yield and the capital gains yield, which is the growth rate of dividends, to determine the stock's value.

Question 17

a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

The stock's price is expected to grow at the same rate as the dividend, which is 5% per year, assuming the stock is in equilibrium.

Question 18

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

The stock's current price can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (rs - g). Here, D1 = $0.75, rs = 10.5% or 0.105, and g = 6.4% or 0.064. Plugging in these values, P = 0.75 / (0.105 - 0.064) = 0.75 / 0.041 = $18.29.

Question 19

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Accepted Answer

The dividend yield on a constant growth stock is indeed equal to its expected total return minus its expected capital gains yield. This is because the total return on a stock is composed of the dividend yield plus the capital gains yield.

Question 20

Companies can issue different classes of common stock Which of the following statements concerning stock classes is CORRECT?

Accepted Answer

Some class or classes of common stock are entitled to more votes per share than other classes. This is known as a dual-class stock structure, where certain shareholders have more voting power than others. It is common among tech companies where founders and insiders hold a separate class of stock with more voting rights, while public investors hold a class with limited voting rights. The other options are not true, as not all firms have multiple classes of stock (some have only one), all stocks do not have to pay the same dividend, and not all common stocks fall into one of three classes.

Quiz 5: Stocks

Merrell Enterprises's stock has an expected return of 14% The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

50 per share is the current price for Foster Farms' stockThe 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?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25) 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?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return Which of the following statements is CORRECT?

constant growth stocks are in equilibrium, have the same price, and have the same required rate of return Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00 The dividend is expected to decline at a rate of 5% a year forever (g = -5%) If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

preemptive right is important to shareholders because it

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?

in analyzing a stock, find that its expected return exceeds its required returnThis suggests that you think

share of Lash Inc.'s 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?

markets are in equilibrium, which of the following conditions will exist?

Kelly Enterprises'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?

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?

Which of the following statements is CORRECT?

a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

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?

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Companies can issue different classes of common stock Which of the following statements concerning stock classes is CORRECT?