Question 1

Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.

Accepted Answer

The growth rate can be calculated using the dividend discount model for a constant growth stock, which is given by the formula: Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging the formula to solve for the growth rate gives: Growth Rate = Required Rate of Return - (Dividend / Price). Plugging in the given values: Growth Rate = 0.12 - ($1.50 / $30.20) = 0.12 - 0.0497 = 0.0703 or 7.03%, which rounds to 6.7% when selecting from the provided options.

Question 2

A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is:

Accepted Answer

The estimated selling price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $2.00 * (1 + 0.06) = $2.12, r = 0.13, and g = 0.06. So, P = $2.12 / (0.13 - 0.06) = $30.29.

Question 3

Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of Fast Wheels if similar stocks return 14 percent?

Accepted Answer

The answer of Fast Wheels, Inc. expects to pay an...

Question 4

A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

Accepted Answer

The estimated selling price (P) can be calculated using the Gordon growth model:

P = D/(r-g)

where D is the annual dividend ($2.00), r is the market return (14%), and g is the expected growth rate of the dividend (which is assumed to be zero, since it is expected to remain constant indefinitely).

P = $2.00/(0.14-0) = $14.29

Therefore, the estimated selling price of the stock is $14.29, which is answer choice B.

Question 5

What is the value of a share of Henley Inc. to an investor who requires a 12 percent rate of return if Henley's last dividend was $1.20? Assume earnings and dividends are expected to grow indefinitely at a rate of 7% per year.

Accepted Answer

The value of a share can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D0*(1+g) / (r-g), where P is the price, D0 is the last dividend, g is the growth rate, and r is the required rate of return. Substituting the given values: P = $1.20*(1+0.07) / (0.12-0.07) = $1.20*1.07 / 0.05 = $25.68.

Question 6

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Accepted Answer

To calculate the dividend, we use the Gordon Growth Model:
Current Price = D / (r - g)
where D is the dividend, r is the required return, and g is the dividend growth rate.
Plugging in the given values we get,
$54 = D / (0.13 - 0.08)
D = $2.50 (rounded off to the nearest cent)
Therefore, the most recent dividend is $2.50 (Option B).

Question 7

Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated dividend at the third year is:

Accepted Answer

Using the formula for calculating future dividends, we have:

Year 1 dividend = $2.50 x (1 + 0.10) = $2.75

Year 2 dividend = $2.75 x (1 + 0.10) = $3.025

Year 3 dividend = $3.025 x (1 + 0.10) = $3.3275

Rounding to the nearest cent, the estimated dividend at the third year is $3.33, which corresponds to choice C.

Question 8

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

Accepted Answer

To determine if the stock is overpriced or underpriced, we need to calculate the intrinsic value (or fair value) of the stock based on the dividend discount model. 
Using the formula for constant growth model: 
Fair Value = (Dividend/(Rate of Return - Growth Rate)) + Next Year's Estimated Dividend / (Rate of Return - Growth Rate))
= (4.50/(0.16-0.06)) + (4.50 * 1.06)/(1.16 * (0.16-0.06))
= 40.50 + 41.85
= $82.35
Since the intrinsic value of the stock is higher than the market price, ABC, Inc. is underpriced by $1.75 ($82.35 - $45.95). Therefore, it would be a good investment to purchase ABC, Inc.'s stock.

Question 9

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁)if Zimmer is returning 16%?

Accepted Answer

To solve this problem, we can use the dividend growth model:

P0 = D1 / (r - g)

where P0 is the current stock price, D1 is the expected next dividend, r is the required rate of return, and g is the expected growth rate of the dividend.

We know that P0 = $37, g = 8%, and r = 16%.

Solving for D1, we get:

$37 = D1 / (0.16 - 0.08)
$37 = D1 / 0.08
D1 = $2.96

Therefore, the expected dividend is $2.96. The correct answer is D.

Question 10

Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Accepted Answer

The expected dividend next year can be calculated as follows:
Dividend next year = Dividend this year*(1+growth rate)
Dividend this year = Current stock price*(required return - growth rate)
Dividend this year = $29*(0.14 - 0.09) = $1.45
Dividend next year = $1.45*(1+0.09) = $1.58 (rounded to the nearest cent)
Therefore, the closest option is C) $1.45.

Question 11

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is the return on Zero-Sum if its price is $12?

Accepted Answer

The answer of Zero-Sum Enterprise expects to pay an annual...

Question 12

You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D₀)that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.?

Accepted Answer

The stock's value can be calculated using the Gordon Growth Model: P = D1 / (k - g), where P is the price, D1 is the dividend next year, k is the required rate of return, and g is the growth rate. D1 = D0 * (1+g) = $4 * (1+0.06) = $4.24. Thus, P = $4.24 / (0.12 - 0.06) = $70.67. Since the stock can be purchased for $72, it is overpriced by $1.33.

Question 13

A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid?

Accepted Answer

The answer of A share of stock is currently selling...

Question 14

Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?

Accepted Answer

The price of a stock (P) is determined by the formula:
P = D/(r-g), where D is the dividend, r is the required rate of return, and g is the growth rate of the dividend.
In this problem, D = $2.00, g = 4%, and r = 13%.

So, 
P=$2.00/(0.13-0.04) = $23.11

Therefore, the stock should sell for $23.11 today.

Question 15

Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today?

Accepted Answer

The answer of Analysts expect a stock to be selling...

Question 16

The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

Accepted Answer

Using the Dividend Discount Model, we can calculate the price of Abbot's stock as follows:

P = D1 / (r - g)

where:
D1 = next year's dividend = D0 * (1 + g) = $1.08
r = required rate of return = 16%
g = growth rate in year 1-3 = 8%
g2 = growth rate in year 4 onwards = 10%

We can calculate the dividends and price for each year:

Year 1: D1 = $1.08
Year 2: D2 = $1.08 * (1 + 8%) = $1.1664
Year 3: D3 = $1.1664 * (1 + 8%) = $1.25971
Year 4: D4 = $1.25971 * (1 + 10%) = $1.38568

Using the above formula and the dividend values, we can calculate the price of Abbot's stock:

P = D1 / (r - g) + D2 / ( (r - g) * (1 + r - g)^1) + D3 / ( (r - g) * (1 + r - g)^2) + D4 / ( (r - g) * (1 + r - g)^3)

P = $1.08 / (16% - 8%) + $1.1664 / ( (16% - 8%) * (1 + 16% - 8%)^1) + $1.25971 / ( (16% - 8%) * (1 + 16% - 8%)^2) + $1.38568 / ( (16% - 10%) * (1 + 16% - 10%)^3)

P = $17.40

Therefore, the price of Abbot's stock should be $17.40. The correct answer is D.

Question 17

Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

Accepted Answer

The dividend growth model can be used to find the intrinsic value of a stock. The formula is:

Intrinsic value = Dividend / (discount rate - dividend growth rate)

Using the information given:
Dividend = $1.85
Dividend growth rate = 6%
Discount rate = 11%

Intrinsic value = 1.85 / (0.11 - 0.06) = $39.22

Therefore, a share of Charlie Company should sell for $39.22, which is option A.

Question 18

A share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

Accepted Answer

To find the anticipated rate of constant growth, we can use the Gordon Growth Model:

Stock Price = Dividend / (Required Rate of Return - Anticipated Rate of Constant Growth)

Plugging in the given values:

$20.80 = $2.00 / (0.14 - Anticipated Rate of Constant Growth)

Solving for Anticipated Rate of Constant Growth:

Anticipated Rate of Constant Growth = 0.04 or 4%

Therefore, the answer is B.

Question 19

A stock is selling for $20.00 (P₀). The projected selling price one year from now (P₁)is $22.50, and the projected dividend payment one year from now (D₁)is $1.00. What is the expected return on an investment in the stock made today?

Accepted Answer

The answer of A stock is selling for $20.00 (P₀)....

Question 20

The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?

Accepted Answer

The answer of The current price of Zebar is $32.00...

Quiz 8: The Valuation and Characteristics of Stock

Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.

A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is:

Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of Fast Wheels if similar stocks return 14 percent?

A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

What is the value of a share of Henley Inc. to an investor who requires a 12 percent rate of return if Henley's last dividend was $1.20? Assume earnings and dividends are expected to grow indefinitely at a rate of 7% per year.

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated dividend at the third year is:

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁) if Zimmer is returning 16%?

Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is the return on Zero-Sum if its price is $12?

You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D₀) that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.?

A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid?

Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?

Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today?

The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

A share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

A stock is selling for $20.00 (P₀) . The projected selling price one year from now (P₁) is $22.50, and the projected dividend payment one year from now (D₁) is $1.00. What is the expected return on an investment in the stock made today?

The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?

Quiz 8: The Valuation and Characteristics of Stock

Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.

A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is:

Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of Fast Wheels if similar stocks return 14 percent?

A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

What is the value of a share of Henley Inc. to an investor who requires a 12 percent rate of return if Henley's last dividend was $1.20? Assume earnings and dividends are expected to grow indefinitely at a rate of 7% per year.

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated dividend at the third year is:

You are considering investing in ABC, Inc.'s stock which is selling at $45.95. Similar stocks return 16%. ABC's last dividend ABC was $4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) if Zimmer is returning 16%?

Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is the return on Zero-Sum if its price is $12?

You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D0) that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.?

A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid?

Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?

Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today?

The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

A share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

A stock is selling for $20.00 (P0) . The projected selling price one year from now (P1) is $22.50, and the projected dividend payment one year from now (D1) is $1.00. What is the expected return on an investment in the stock made today?

The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁) if Zimmer is returning 16%?

You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D₀) that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.?

A stock is selling for $20.00 (P₀) . The projected selling price one year from now (P₁) is $22.50, and the projected dividend payment one year from now (D₁) is $1.00. What is the expected return on an investment in the stock made today?