Question 1

What is the current value of a share of HiGro common stock that does not pay a current dividend? Earnings are growing at a 20 percent per year rate for the next 10 years. Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years. Current earnings are $1.50 per share.

Accepted Answer

Solution:
None of the answers are correct. There is insufficient information in the problem.

Question 2

What is the rate of return to an investor in the stock of Bajo, Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25.

Accepted Answer

Solution: D/P₀ = .80 = .0604 or 6.04% 13.25

Question 3

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 an investor's required rate of return on Zero-Sum if the current price is $12?

Accepted Answer

Solution: k_e= $0.48/$12 + 0.08 = 12%

Question 4

CPU Company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to increase at the rate of $.25 per share for the next several years. Determine the current value of CPU's common stock to an investor who expects to be able to sell the stock for $35 per share after 3 years, given that the investor requires a 14 percent rate of return on this security.

Accepted Answer

Solution: P₀ = $2.75(0.877) + $3.00(0.769) + $3.25(0.675) + $35(0.675) = $30.54

Question 5

The earnings and dividends of Nebula Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Nebula currently pays a dividend of $0.50 per share. What is the value of Nebula stock to an investor who requires a 14 percent rate of return?

Accepted Answer

Solution:
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Question 6

If the stock of Sun Computers is selling for $34 and the current dividend is $0.48, what is the implied constant growth rate of dividends to an investor who requires a 14% rate of return?

Accepted Answer

Solution:
34 = .48(1+g)/(.14-g)
g = 12.41%

Question 7

During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years.

Accepted Answer

Solution: PV₀= FVn (PVIF_g,n) $2.70 = $5.00 (PVIF_{g, 8}) g = 0.08 (8%) from Table II P₀ = $5.40/(0.16 - 0.08) = $67.50

Question 8

Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.

Accepted Answer

Solution:
0.l4 = $3.00/$50 + g
g = 0.08 or 8%

Question 9

During the past 8 years, Beef Wellington Cattle Company's common stock dividends have grown from $2.00 to $3.19. Estimate the compound annual dividend growth rate over the 8 year period.

Accepted Answer

Solution:
$2.00 = $3.19(PVIFg,?)
(PVIFg,?) = $2.00/$3.19 = .627
g = 6%, from Table II

Question 10

Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

Accepted Answer

Solution:
0.12 = $2(1 + g)/$38 + g
g = 0.064, or 6.4%

Question 11

Helix common stock currently sells for $30 and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?

Accepted Answer

Solution:
0.15 = ($1.50(1+g) + g/$30) so g = 0.095

Question 12

Over the past 5 years, Dippity Doo-Dah Party Dips' common stock earnings per share have grown from $0.62 to $0.91. If an investor in Dippity's stock is assumed to have a required rate of return of 14%, what is the current value of Dippity if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.

Accepted Answer

Solution: $0.91 = $0.62(FVIF_g,5) FVIF = $0.91/$0.62 = 1.468 so g = 8% P₀ = $0.12(1.08)/(0.14 - 0.08) = $2.16

Question 13

The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor's required rate of return is 14 percent?

Accepted Answer

Solution:
$37.50 = $1.10(1 + g)/ (0.14 - g)
g = 10.75%

Question 14

What is the current value of a share of Chyrox if its current dividend is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72.

Accepted Answer

Solution:
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Question 15

What is the current value of Frocks & Socks Clothiers, Inc. to an investor who has a required rate of return of 12 percent? The current dividend is $1.00 and the dividends are expected to grow 8 percent per year for 3 years. At the end of 3 years the investor expects to sell the security for $76.

Accepted Answer

Solution:
 11ea10f6_a141_6d2c_b6b3_4369a71f7a19_TB2040_00

Question 16

Moonshine Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Moonshine's common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the company's common stock to an investor who requires a 13 percent rate of return on these securities.

Accepted Answer

Solution: P₀ = $4.16/(0.13 - 0.04) = $46.22

Question 17

Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?

Accepted Answer

Solution: P₀= $1.40/0.14 = $10

Question 18

What is the current value of a share of Augat common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent, and expects to sell the security in 5 years.

Accepted Answer

Solution:
The constant growth rate model cannot be used because the growth rate is greater than required rate of return.

Question 19

Assume that the dividend( $3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.

Accepted Answer

Solution: P₀ = $3.25/0.12 = $27.08

Question 20

Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current level of $.53. What is the approximate annual compound growth rate of Sunshine's dividends?

Accepted Answer

Solution:
$0.53/$0.24 = 2.2083 or approximately 12% from Table I

Quiz 7: Common Stock: Characteristics, Valuation, and Issuance