Question 1

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it.After 10 years,you expect to sell the stock for $26.15.What is the present value of a share for this company if you want an 8% return?

Accepted Answer

The answer of You buy a stock for which you...

Question 2

Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?

Accepted Answer

Assuming a constant growth to dividends is a simplifying assumption to estimate future dividends, even though actual dividend patterns may not follow a constant growth rate. By assuming a growth rate, we can project future dividends and estimate their present value.

Question 3

AirH&H Inc.just paid a dividend of $1.33.Its stock has a dividend growth rate of 7.6% and a required return of 12.21%.What is the current stock price if we anticipate dividends stopping in 10 years?

Accepted Answer

The answer of AirH&H Inc.just paid a dividend of $1.33.Its...

Question 4

In applying the constant dividend model with infinite horizon to price a stock for purchase,we assume the company will pay dividends forever and that we will hold onto our stock forever.

Accepted Answer

The constant dividend model with infinite horizon assumes that the company will pay dividends forever, and that the investor will hold onto their stock forever. This is the basis for the perpetuity formula used in the model.

Question 5

If we believe that a company is following a constant dividend policy,we can then use the current dividend to predict all future dividends because they are the same.

Accepted Answer

If a company is following a constant dividend policy, then it is expected that future dividends will be equivalent to the current dividend. Therefore, we can use the current dividend as a basis to predict all future dividends.

Question 6

The constant growth dividend model requires that ________.

Accepted Answer

The constant growth dividend model requires that the return rate r is greater than the growth rate g of the dividend stream, as this allows for the stock to have a positive present value. If the growth rate is greater than the return rate, the present value of the stock would become infinite, which is not plausible.

Question 7

Wallboard Inc,plans to pay a dividend in one year (Div₁)of $0.80,the dividend growth rate (g)is expected to be 6%,and the required rate of return (r)for the firm's stock is 10%.What is the stock price,according to the constant growth dividend model?

Accepted Answer

According to the constant growth dividend model, the stock price (P) can be calculated using the formula:

P = DivS1 / (r - g)

Where DivS1 is the expected dividend in the next period, r is the required rate of return, and g is the expected growth rate.

Substituting the given values, we get:

P = 0.80 / (0.10 - 0.06)
P = 0.80 / 0.04
P = 20.00

Therefore, the stock price according to the constant growth dividend model is $20.00. The correct answer is C.

Question 8

For the CloudB&B Company Inc.,a stream of past dividends includes an initial dividend is $1.20 and the most recent dividend of $1.80.The number of years between these two dividends (n)is 8 years.What is the average annual growth rate of dividends during this eight-year period? Use a calculator to determine your answer.

Accepted Answer

The answer of For the CloudB&B Company Inc.,a stream of...

Question 9

The dividend stream we would have legal claim to is for only that period of the company's life during which we own the stock or until the company goes out of business and stops paying dividends.

Accepted Answer

This statement is true. As shareholders, we are entitled to receive dividends only for the duration of our ownership in the company or until the company ceases to pay dividends. Once we sell our shares, we no longer have a legal claim to any future dividend payments.

Question 10

Nash Inc.has an 12% required rate of return.It does not expect to initiate dividends for 15 years,at which time it will pay $3.00 per share in dividends.At that time,Nash expects its dividends to grow at 6% forever.What is an estimate of Nash's price in 15 years (P₁₅)if its dividend at the end of year 15 is $3.00?

Accepted Answer

The answer of Nash Inc.has an 12% required rate of...

Question 11

If we assume that a company will be in business forever and that it continues to pay dividends during its existence,then we have an annuity dividend stream.

Accepted Answer

An annuity involves payments of equal amounts at regular intervals for a specific period of time, whereas a dividend stream from a company assumed to be in business forever and paying dividends continuously would be considered a perpetuity, not an annuity, because it does not have a fixed end period.

Question 12

Bartlett Batteries Inc.just paid an annual dividend of $1.12.If you expect a constant growth rate of 4% and have a required rate of return of 13%,what is the current stock price according to the constant growth dividend model?

Accepted Answer

The constant growth dividend model (also known as the Gordon Growth Model) calculates the price of a stock by dividing the next year's dividends per share by the difference between the required rate of return and the dividend growth rate. The formula is P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Since the dividend just paid is $1.12 and it's expected to grow at a rate of 4%, the dividend next year (D1) will be $1.12 * (1 + 0.04) = $1.1648. Plugging the values into the formula gives P = $1.1648 / (0.13 - 0.04) = $1.1648 / 0.09 = $12.9422, which rounds to $12.94.

Question 13

The most recent dividend (Div₀)from Wallboard Inc,is $0.80,the dividend growth rate (g)is expected to be 6.25%,and the required rate of return (r)on the firm's stock is 10%.What is the stock price according to the constant growth dividend model?

Accepted Answer

The stock price using the constant growth dividend model (Gordon Growth Model) is calculated as P = D0 * (1 + g) / (r - g). Substituting the given values: P = 0.80 * (1 + 0.0625) / (0.10 - 0.0625) = $22.67.

Question 14

When estimating the annual growth rate of a dividend stream,we can use a short-cut to determining the average growth rate by ________.

Accepted Answer

To estimate the annual growth rate of a dividend stream using a shortcut, we need to use the first and last dividend in the stream and the time-value of money equation. Specifically, we can use the following formula: 
average growth rate = (last dividend/first dividend)^(1/number of years) - 1
This formula assumes that the dividend growth rate has been constant over the time period in question. If this assumption is not valid, a more complex analysis may be necessary.

Question 15

Which of the statements below is FALSE?

Accepted Answer

The statement is false because it describes a pattern of dividends growing by a fixed amount at fixed intervals, which is actually a common pattern known as constant growth, not an unlikely one.

Question 16

A corporation is scheduled to produce a line of products for the next ten years and then go out of business.The firm will pay an annual dividend of $1.75 for only those ten years.What is the present value of a share for this company if we want an 8% annual return on the stock?

Accepted Answer

The present value of a share is the sum of the present values of all the dividends that will be paid over the next ten years. The present value of a dividend is the dividend divided by the discount rate. In this case, the discount rate is 8%, so the present value of a dividend of $1.75 is $1.75 / 0.08 = $21.88. The present value of a share is the sum of the present values of all the dividends that will be paid over the next ten years, so the present value of a share is $21.88 * 10 = $218.80.

Question 17

Rogue Motors Inc.has a 11% required rate of return.The firm does not expect to initiate dividends for 10 years,at which time it will pay $2.00 per share in dividends.At that time,the firm expects its dividends to grow at 6% forever.What is an estimate of the firms' price in 10 years (P₁₀)if its dividend at the end of year 10 is $2.00?

Accepted Answer

The correct answer is A because the estimated price of the firm in 10 years is $42.40. This is calculated using the formula P10 = D10 / (r - g), where D10 is the dividend at the end of year 10 ($2.00), r is the required rate of return (11%), and g is the growth rate of dividends (6%).

Question 18

Cavalier Custom Design Inc.just paid a dividend of $0.73.Its stock has a dividend growth rate of 5.62% and a required return of 10.21%.What is the current stock price if we anticipate dividends stopping in 20 years?

Accepted Answer

The current stock price can be calculated using the dividend discount model for a stock with a finite dividend growth period. The formula is P = D * [(1 - (1 + g)^n / (1 + r)^n) / (r - g)], where D is the dividend just paid, g is the growth rate, r is the required return, and n is the number of years dividends are expected. Plugging in the values: P = 0.73 * [(1 - (1 + 0.0562)^20 / (1 + 0.1021)^20) / (0.1021 - 0.0562)] gives approximately $9.62.

Question 19

You are examining a firm with a stream of past dividends where the initial dividend is $1.32 and the most recent dividend is $1.96.The number of years between these two dividends (n)is 6 years.What is the average annual dividend growth rate during this six-year period? Use a calculator to determine your answer.

Accepted Answer

The answer of You are examining a firm with a...

Question 20

________ means that the percentage increase in the dividend is the same each year.

Accepted Answer

Constant growth means that the percentage increase in the dividend is the same each year, which is a predictable pattern of growth. Inconsistent growth would mean that the percentage increase varies from year to year, while no growth would mean that there is no increase in the dividend at all. A constant cash flow is not the same as constant growth, as cash flow refers to the amount of money coming in and out, while growth refers specifically to the percentage increase in the dividend.

Quiz 7: Stocks and Stock Valuation

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it.After 10 years,you expect to sell the stock for $26.15.What is the present value of a share for this company if you want an 8% return?

Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?

AirH&H Inc.just paid a dividend of $1.33.Its stock has a dividend growth rate of 7.6% and a required return of 12.21%.What is the current stock price if we anticipate dividends stopping in 10 years?

In applying the constant dividend model with infinite horizon to price a stock for purchase,we assume the company will pay dividends forever and that we will hold onto our stock forever.

If we believe that a company is following a constant dividend policy,we can then use the current dividend to predict all future dividends because they are the same.

The constant growth dividend model requires that ________.

Wallboard Inc,plans to pay a dividend in one year (Div₁) of $0.80,the dividend growth rate (g) is expected to be 6%,and the required rate of return (r) for the firm's stock is 10%.What is the stock price,according to the constant growth dividend model?

The dividend stream we would have legal claim to is for only that period of the company's life during which we own the stock or until the company goes out of business and stops paying dividends.

If we assume that a company will be in business forever and that it continues to pay dividends during its existence,then we have an annuity dividend stream.

Bartlett Batteries Inc.just paid an annual dividend of $1.12.If you expect a constant growth rate of 4% and have a required rate of return of 13%,what is the current stock price according to the constant growth dividend model?

The most recent dividend (Div₀) from Wallboard Inc,is $0.80,the dividend growth rate (g) is expected to be 6.25%,and the required rate of return (r) on the firm's stock is 10%.What is the stock price according to the constant growth dividend model?

When estimating the annual growth rate of a dividend stream,we can use a short-cut to determining the average growth rate by ________.

Which of the statements below is FALSE?

A corporation is scheduled to produce a line of products for the next ten years and then go out of business.The firm will pay an annual dividend of $1.75 for only those ten years.What is the present value of a share for this company if we want an 8% annual return on the stock?

Cavalier Custom Design Inc.just paid a dividend of $0.73.Its stock has a dividend growth rate of 5.62% and a required return of 10.21%.What is the current stock price if we anticipate dividends stopping in 20 years?

________ means that the percentage increase in the dividend is the same each year.

Quiz 7: Stocks and Stock Valuation

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it.After 10 years,you expect to sell the stock for $26.15.What is the present value of a share for this company if you want an 8% return?

Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?

AirH&H Inc.just paid a dividend of $1.33.Its stock has a dividend growth rate of 7.6% and a required return of 12.21%.What is the current stock price if we anticipate dividends stopping in 10 years?

In applying the constant dividend model with infinite horizon to price a stock for purchase,we assume the company will pay dividends forever and that we will hold onto our stock forever.

If we believe that a company is following a constant dividend policy,we can then use the current dividend to predict all future dividends because they are the same.

The constant growth dividend model requires that ________.

Wallboard Inc,plans to pay a dividend in one year (Div1) of $0.80,the dividend growth rate (g) is expected to be 6%,and the required rate of return (r) for the firm's stock is 10%.What is the stock price,according to the constant growth dividend model?

The dividend stream we would have legal claim to is for only that period of the company's life during which we own the stock or until the company goes out of business and stops paying dividends.

If we assume that a company will be in business forever and that it continues to pay dividends during its existence,then we have an annuity dividend stream.

Bartlett Batteries Inc.just paid an annual dividend of $1.12.If you expect a constant growth rate of 4% and have a required rate of return of 13%,what is the current stock price according to the constant growth dividend model?

The most recent dividend (Div0) from Wallboard Inc,is $0.80,the dividend growth rate (g) is expected to be 6.25%,and the required rate of return (r) on the firm's stock is 10%.What is the stock price according to the constant growth dividend model?

When estimating the annual growth rate of a dividend stream,we can use a short-cut to determining the average growth rate by ________.

Which of the statements below is FALSE?

A corporation is scheduled to produce a line of products for the next ten years and then go out of business.The firm will pay an annual dividend of $1.75 for only those ten years.What is the present value of a share for this company if we want an 8% annual return on the stock?

Cavalier Custom Design Inc.just paid a dividend of $0.73.Its stock has a dividend growth rate of 5.62% and a required return of 10.21%.What is the current stock price if we anticipate dividends stopping in 20 years?

________ means that the percentage increase in the dividend is the same each year.

Wallboard Inc,plans to pay a dividend in one year (Div₁) of $0.80,the dividend growth rate (g) is expected to be 6%,and the required rate of return (r) for the firm's stock is 10%.What is the stock price,according to the constant growth dividend model?

The most recent dividend (Div₀) from Wallboard Inc,is $0.80,the dividend growth rate (g) is expected to be 6.25%,and the required rate of return (r) on the firm's stock is 10%.What is the stock price according to the constant growth dividend model?