Question 1

Shares of Hot Donuts common stock are currently selling for $32.35. The last annual dividend paid was $1.10 per share and the market rate of return is 10.7 percent. At what rate is the dividend growing?

Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where P is the price, D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. Rearranging for g gives g = r - (D1/P). Here, D1 = $1.10 * (1 + g), P = $32.35, and r = 10.7%. Solving for g gives approximately 7.06%.

Question 2

Hightower Pharmacy just paid a $3.10 annual dividend. The company has a policy of increasing the dividend by 3.8 percent annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a 16 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?

Accepted Answer

The answer of Hightower Pharmacy just paid a $3.10 annual...

Question 3

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?

Accepted Answer

The answer of Northern Gas recently paid a $2.80 annual...

Question 4

Electronics, Inc. common stock returned a nifty 22.68 percent rate of return last year. The dividend amount was $0.25 a share which equated to a dividend yield of 0.84 percent. What was the rate of price appreciation for the year?

Accepted Answer

g = 0.2268 - 0.0084 = 21.84 percent

Question 5

Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the dividend be six years from now?

Accepted Answer

D₆ = $1.67 F1F1F1S1F1F1F10 (1.0275)⁶ = $1.97

Question 6

The current dividend yield on Clayton's Metals common stock is 2.5 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

Accepted Answer

The required rate of return is the dividend yield plus the dividend growth rate. The dividend yield is 2.5 percent, and the dividend growth rate is expected to remain constant at the current level of 4 percent. Therefore, the required rate of return is 2.5 percent + 4 percent = 6.55 percent.

Question 7

National Warehousing just announced it is increasing its annual dividend to $1.18 next year and establishing a policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this stock be worth 8 years from now if the required rate of return is 9.5 percent?

Accepted Answer

The answer of National Warehousing just announced it is increasing...

Question 8

Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid?

Accepted Answer

To find the amount of the last dividend paid, we use the formula for the Gordon Growth Model:

Previous dividend * (1 + dividend growth rate) = Last dividend
Market rate of return - dividend growth rate = Required rate of return

We know that the current stock price (P0) is $38, the market rate of return (r) is 8.20%, and the dividend growth rate (g) is 3%. We can use the formula for the Gordon Growth Model to find the last dividend:

P0 = D1 / (r - g)
$38 = D1 / (0.082 - 0.03)
D1 = $1.92

Therefore, the amount of the last dividend paid was $1.92.
The best choice is C.

Question 9

Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the expected amount of the next dividend?

Accepted Answer

The answer of Douglass Gardens pays an annual dividend that...

Question 10

The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Accepted Answer

First, we need to calculate the dividend yield which is the annual dividend per share divided by the stock price. 
Next year's dividend: $1.35 
Dividend growth rate: 3% 
Therefore, the expected dividend for the following year will be $1.39 ($1.35 x 1.03). 
Dividend yield: $1.39/$28.16 = 0.049 or 4.9% 
Finally, we can use the dividend growth model to calculate the market rate of return. 
Market rate of return = dividend yield + dividend growth rate 
Market rate of return = 4.9% + 3% = 7.9% 
Therefore, the market rate of return on this stock is 7.9%, which corresponds to answer choice B.

Question 11

Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its common stock next year. This year, the company paid a dividend of $2.75 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth five years from now if the applicable discount rate is 11.7 percent?

Accepted Answer

The answer of Winter Time Adventures is going to pay...

Question 12

You want to purchase some shares of Green World stock but need a 15 percent rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $0.90 annual dividend per share?

Accepted Answer

The answer of You want to purchase some shares of...

Question 13

Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 11.50 percent at the time of your purchase?

Accepted Answer

The answer of Upper Crust Bakers just paid an annual...

Question 14

Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a 16 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today?

Accepted Answer

The maximum price you are willing to pay for a stock with constant dividends is calculated using the formula: Price = Dividend / Required Rate of Return. Here, the dividend is $0.60 and the required rate of return is 16% (0.16). Thus, Price = $0.60 / 0.16 = $3.75.

Question 15

Home Canning Products common stock sells for $44.96 a share and has a market rate of return of 12.8 percent. The company just paid an annual dividend of $1.04 per share. What is the dividend growth rate?

Accepted Answer

The answer of Home Canning Products common stock sells for...

Question 16

Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $0.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?

Accepted Answer

To calculate the current value of a share, we use the dividend discount model:

Current stock price = Dividend / (Required rate of return - Growth rate)

For the first four years, the growth rate is 15%, and then it drops to 3.5%. We can use the formula to calculate the current stock price:

Year 1: $0.20 x (1 + 15%) = $0.23
Year 2: $0.23 x (1 + 15%) = $0.26
Year 3: $0.26 x (1 + 15%) = $0.30
Year 4: $0.30 x (1 + 15%) = $0.35
Year 5 (and beyond): $0.35 x (1 + 3.5%)

Now we can plug in these values to get the stock price:

Current stock price = $0.23/(0.155 - 0.15) + $0.26/(0.155 - 0.15)^2 + $0.30/(0.155 - 0.15)^3 + $0.35/(0.155 - 0.15)^4 + $0.35/(0.155 - 0.035)^5

Solving this equation, we get a current stock price of $2.49. Therefore, the best choice is C.

Question 17

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

Accepted Answer

The answer of The common stock of Textile Mills pays...

Question 18

A stock pays a constant annual dividend and sells for $56.10 a share. If the market rate of return on this stock is 15.85 percent, what is the amount of the next annual dividend?

Accepted Answer

D₀ = 0.1585 F1F1F1S1F1F1F10 $56.10 = $8.89

Question 19

Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $38.90 a share?

Accepted Answer

The answer of Denver Shoppes will pay an annual dividend...

Question 20

Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?

Accepted Answer

Dividend yield = 0.092 - 0.026 = 6.6 percent

Quiz 8: Stock Valuation