Question 1

If a company has a current stock price of $50, an EPS of $1.75/share; EPS growth rate of 20% and the investors rate of return is 13%, calculate the percentage of share value arising from growth
Opportunities.

Accepted Answer

We can calculate the expected EPS for the next year using the EPS growth rate:
Expected EPS = EPS * (1 + EPS growth rate) = $1.75 * (1 + 0.20) = $2.10

Using the dividend discount model, we can calculate the intrinsic value of the stock based on the expected dividends and the investors rate of return:
Intrinsic value = Expected dividend / (Investor's rate of return - Dividend growth rate)

We can calculate the expected dividend using the payout ratio:
Payout ratio = Dividend / EPS
Dividend = Payout ratio * EPS
Assuming a payout ratio of 50%, we get:
Dividend = 0.50 * $1.75 = $0.875

The dividend growth rate is equal to the EPS growth rate, so it is 20%.

Plugging in the numbers, we get:
Intrinsic value = [$0.875 * (1 + 0.20)] / (0.13 - 0.20) = $23.10

The percentage of share value arising from growth opportunities is:
($23.10 - $1.75) / $23.10 = 0.924 = 92.4%

Therefore, the closest answer is C) 73.1%

Question 2

CBC stock is expected to sell for $22 two years from now. Supernormal growth of 5% is expected for the next two years. The current dividend is $1 and the required return is 15%. What constant
Growth rate is expected beginning in year 3?

Accepted Answer

The answer of CBC stock is expected to sell for...

Question 3

Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michael's wishes to sell some new preferred stock at par, what rate should it assign to the new shares?

Accepted Answer

The answer of Michael's Inc. 9% preferred stock is currently...

Question 4

Leon purchased 1,000 shares of LJK stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Leon's required rate of return is 13% on this type of
Investment. What is the capital gains yield on LJK stock?

Accepted Answer

The answer of Leon purchased 1,000 shares of LJK stock...

Question 5

The current price of XYZ stock is $51. Dividends are expected to grow at 7% indeﬁnitely and the most recent dividend was $1. What is the required rate of return on XYZ stock?

Accepted Answer

Using the Gordon Growth model, the required rate of return can be calculated as follows:

$1.07 / ($51 - $1.07) = 0.0214 or 2.14%

Adding the growth rate (7%) to the required rate of return (2.14%) yields 9.14%, which is closest to option B: 9.1%.

Question 6

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 percentage of share value arising from growth
Opportunities.

Accepted Answer

Using the Gordon Growth Model formula, we can calculate the intrinsic value of the stock as follows:
Intrinsic value = (EPS * (1 + EPS growth rate)) / (investor's rate of return - EPS growth rate)
Intrinsic value = ($1.10 * 1.20) / (0.115 - 0.20) = $23.76
Now, we can calculate the percentage of the current stock price that is attributed to growth opportunities using the following formula:
Percentage of share value arising from growth = ((Intrinsic value - Current stock price) / Current stock price) * 100%
Percentage of share value arising from growth = (($23.76 - $78) / $78) * 100% = -67.85%
However, since the EPS growth rate is higher than the investor's rate of return, this result is negative, indicating that the stock is overvalued. Therefore, we can conclude that none of the answer choices provided are correct.

Question 7

Assume the expected growth rate in dividends is 7%. Then the constant growth model suggests that the required return on Big Hat stock is:

Accepted Answer

The constant growth model formula is:

P0 = D1 / (r - g)

Where:
P0 = current stock price
D1 = expected dividend next year
r = required return
g = expected growth rate in dividends

We are given that g = 7% and we want to find r. We can use the formula and solve for r:

r = D1 / P0 + g

We do not have information about the current stock price or the next year's dividend, so we cannot use this formula directly. However, we know that the answer choices are all percentages, which suggests that we can use the general rule of thumb for the required return:

r = dividend yield + expected growth rate in dividends

The dividend yield is simply the annual dividend divided by the stock price, and we are not given information about the annual dividend or stock price either. However, we can assume that the dividend yield is roughly equal to the expected long-term average yield for stocks, which is around 2% to 3%. Therefore, we can estimate the required return as follows:

r = 2% to 3% + 7% = 9% to 10%

The closest answer choice to this estimate is D, 8.4%. Therefore, the best choice is D.

Question 8

If Russian Motors closed at $22 and the current quarterly dividend is $1.25, what% yield would be reported in The National Post?

Accepted Answer

The answer of If Russian Motors closed at $22 and...

Question 9

Llano's stock is currently selling for $51. The expected dividend one year from now is $1.50 and the required return is 10%. What is this ﬁrm's dividend growth rate assuming the constant dividend
Growth model is appropriate?

Accepted Answer

Using the Gordon Growth Model: Price = Dividend / (Required Return - Growth Rate). Solving for the growth rate: $51 = $1.50 / (0.10 - g), gives g = 0.07 or 7%.

Question 10

The common stock of Grady Co. returned an 11.25% rate of return last year. The dividend amount was $.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation
On the stock?

Accepted Answer

Dividend yield = Dividend amount/Price
1.5% = 0.70/P
P = $46.67
Rate of price appreciation = Total rate of return - Dividend yield
= 11.25% - 1.5%
= 9.75%

Question 11

The Battery Co. paid $1.20 in dividends last year. Margaret paid a price of $15.00 a share for Battery Co. stock and has an expected return of 8% on this investment. What is the growth rate of the
Battery Co. stock?

Accepted Answer

The answer of The Battery Co. paid $1.20 in dividends...

Question 12

Jamie just paid $8,239 for 100 shares of 6% preferred stock. What rate of return will she earn?

Accepted Answer

To find the rate of return, we need to divide the annual dividend (which is 6% of the par value) by the price paid for the stock:

Annual dividend = 6% of the par value = 6% x $100 = $6

Dividing the price paid ($8,239) by the annual dividend ($6) gives us the number of shares needed to earn a 6% return:

$8,239 / $6 = 1373.17 shares

So Jamie needs to earn $6 per share, and since she only bought 100 shares, she'll earn:

$6 x 100 = $600 per year

To find the rate of return, we divide the annual earnings ($600) by the price paid for the stock:

$600 / $8,239 = 0.0728, or 7.28%

Therefore, the answer is B.

Question 13

ABC Corporation's common stock dividend yield is 2.1%, it just paid a dividend of $1, and is expected to pay a dividend of $1.07 one year from now. Dividends are expected to grow at a
Constant rate indeﬁnitely. What is the required rate of return on ABC stock?

Accepted Answer

To calculate the required rate of return, we can use the dividend discount model (DDM) formula:

r = (D1 / P0) + g

Where:

r = required rate of return
D1 = next year's expected dividend
P0 = current stock price
g = constant growth rate

Plugging in the given values:

D1 = $1.07
D0 = $1
g = (D1 / D0) - 1 = ($1.07 / $1) - 1 = 7%
Dividend yield = D0 / P0 = 2.1%

Rearranging the formula to solve for P0:

P0 = D1 / (r - g)

Substituting the given values:

P0 = $1.07 / (r - 0.07)

Using the dividend yield formula, we know that:

D0 / P0 = 2.1%
$1 / P0 = 2.1%
P0 = $47.62

Substituting P0 in the equation above:

$47.62 = $1.07 / (r - 0.07)
r - 0.07 = $1.07 / $47.62
r - 0.07 = 0.0225
r = 0.0925 or 9.25%

Therefore, the required rate of return is 9.1%, which is closest to option B.

Question 14

The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and sells for $20.24 a share. What is the rate of return on this security?

Accepted Answer

The rate of return on the preferred stock is calculated by dividing the annual dividend by the price per share. So, $1.70 / $20.24 = 0.084 or 8.40%.

Question 15

Mountain Gear, Inc. just announced that its annual dividend for this coming year will be $1.40 a share and that all future dividends are expected to increase by 4.5% annually. What is the market
Rate of return if this stock is currently selling for $28 a share?

Accepted Answer

The answer of Mountain Gear, Inc. just announced that its...

Question 16

Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever.
Stocks of similar risk yield 10%.
What is expected capital gains yield on Bradley Broadcasting stock during year 8?

Accepted Answer

To calculate the expected capital gains yield on Bradley Broadcasting stock during year 8, we need to calculate what the stock price will be in year 8 and compare it to the current stock price. We can calculate the stock price in year 8 using the constant growth dividend discount model:

D8 = $1.331 * (1 + 4%) = $1.38524 (dividend in year 8)
P7 = $1.38524 / (0.10 - 0.04) = $23.0873 (stock price in year 7)
P8 = $23.0873 * (1 + 4%) = $24.0047 (stock price in year 8)

The current stock price can be calculated using the present value of all future dividends:

PV = ($1.10 / 1.1) + ($1.21 / 1.1^2) + ($1.331 / 1.1^3) + (($1.38524 * (1 + 4%)) / (0.10 - 0.04)) / 1.1^4 = $20.0898

The capital gains yield is then:

($24.0047 - $20.0898) / $20.0898 = 19.45%

However, the question specifically asks for the expected capital gains yield during year 8, not overall. We can estimate this by assuming a linear increase in stock price from year 7 to year 8:

Expected capital gains yield = ($24.0047 - $23.0873) / $23.0873 = 3.97% or approximately 4%

Therefore, the best choice is B) 4%.

Question 17

An 8% preferred stock closed yesterday at a price of $91.32. The stock closed today at par. What is the current dividend yield?

Accepted Answer

The current dividend yield is calculated by dividing the annual dividend by the current market price. Since the stock closed at par today, its price is $100 (par value). The annual dividend for an 8% preferred stock is 8% of the par value, which is $8 ($100 * 8%). Therefore, the current dividend yield is $8 / $100 = 8%.

Question 18

If a company has a current stock price of $75, an EPS of $2/share; EPS growth rate of 10% and the investors rate of return is 12%, calculate the percentage of share value arising from growth
Opportunities.

Accepted Answer

The percentage of share value arising from growth opportunities can be calculated using the Gordon Growth Model as follows:

Percentage of share value arising from growth = (EPS * (1+ growth rate) / (investor rate of return - growth rate)) - 1

Plugging in the given values, we get:

Percentage of share value arising from growth = (2 * 1.1 / (0.12 - 0.1)) - 1
= 0.78 or 78%

Therefore, the correct answer is choice C.

Question 19

The preferred stock of Deep South Pies pays an annual dividend of $1.40 and sells for $18.20 a share. What is the rate of return on this security?

Accepted Answer

Rate of return can be calculated as (annual dividend/current stock price)*100. 
In this case, rate of return = (1.4/18.2)*100 = 7.69%. Thus, the correct choice is B.

Question 20

Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must
Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative
Voting?

Accepted Answer

To guarantee her election, Amy must own more than 50% of the outstanding shares. With straight voting, each share is worth one vote, so Amy needs to own 50% of 2,500 shares, which is 1,250 shares. She already owns 625 shares, so she needs to own 1,250 - 625 = 625 more shares.

Quiz 8: Stock Valuation

If a company has a current stock price of $50, an EPS of $1.75/share; EPS growth rate of 20% and the investors rate of return is 13%, calculate the percentage of share value arising from growth Opportunities.

CBC stock is expected to sell for $22 two years from now. Supernormal growth of 5% is expected for the next two years. The current dividend is $1 and the required return is 15%. What constant Growth rate is expected beginning in year 3?

Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michael's wishes to sell some new preferred stock at par, what rate should it assign to the new shares?

Leon purchased 1,000 shares of LJK stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Leon's required rate of return is 13% on this type of Investment. What is the capital gains yield on LJK stock?

The current price of XYZ stock is $51. Dividends are expected to grow at 7% indeﬁnitely and the most recent dividend was $1. What is the required rate of return on XYZ stock?

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 percentage of share value arising from growth Opportunities.

Assume the expected growth rate in dividends is 7%. Then the constant growth model suggests that the required return on Big Hat stock is:

If Russian Motors closed at $22 and the current quarterly dividend is $1.25, what% yield would be reported in The National Post?

Llano's stock is currently selling for $51. The expected dividend one year from now is $1.50 and the required return is 10%. What is this ﬁrm's dividend growth rate assuming the constant dividend Growth model is appropriate?

The common stock of Grady Co. returned an 11.25% rate of return last year. The dividend amount was $.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation On the stock?

The Battery Co. paid $1.20 in dividends last year. Margaret paid a price of $15.00 a share for Battery Co. stock and has an expected return of 8% on this investment. What is the growth rate of the Battery Co. stock?

Jamie just paid $8,239 for 100 shares of 6% preferred stock. What rate of return will she earn?

ABC Corporation's common stock dividend yield is 2.1%, it just paid a dividend of $1, and is expected to pay a dividend of $1.07 one year from now. Dividends are expected to grow at a Constant rate indeﬁnitely. What is the required rate of return on ABC stock?

The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and sells for $20.24 a share. What is the rate of return on this security?

Mountain Gear, Inc. just announced that its annual dividend for this coming year will be $1.40 a share and that all future dividends are expected to increase by 4.5% annually. What is the market Rate of return if this stock is currently selling for $28 a share?

An 8% preferred stock closed yesterday at a price of $91.32. The stock closed today at par. What is the current dividend yield?

If a company has a current stock price of $75, an EPS of $2/share; EPS growth rate of 10% and the investors rate of return is 12%, calculate the percentage of share value arising from growth Opportunities.

The preferred stock of Deep South Pies pays an annual dividend of $1.40 and sells for $18.20 a share. What is the rate of return on this security?

Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative Voting?