Question 1

The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid?

Accepted Answer

The answer of The common stock of Up-Towne Movers sells...

Question 2

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

Accepted Answer

The answer of River Rock, Inc., just paid an annual...

Question 3

Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount?

Accepted Answer

The dividend yield is calculated as the annual dividend divided by the stock price. Therefore, the dividend amount is 2.8% of $27.80, which is $0.78.

Question 4

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

Accepted Answer

The expected value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model). First, calculate the expected dividend in five years using the formula: D5 = D0 * (1 + g)^5. Then, use the formula for the stock price: P5 = D5 / (r - g). Plug in the values: D0 = $1.78, g = 0.0123, r = 0.106. Calculate D5 and then P5 to find the expected stock price.

Question 5

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent?

Accepted Answer

The answer of Horseshoe Stables is losing significant market share...

Question 6

Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate?

Accepted Answer

The dividend growth rate can be calculated using the formula for total return: Total Return = (Dividend Yield) + (Growth Rate). The dividend yield is $1.58 / $18.53 = 0.0853 or 8.53%. The total return is 9.48%, so the growth rate is 9.48% - 8.53% = 0.95%.

Question 7

Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?

Accepted Answer

The price of a stock with a constant dividend can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, Price = $1.39 / 0.146 = $9.52.

Question 8

The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?

Accepted Answer

To find the expected dividend in Year 6, we need to first calculate the annual dividend for Year 2 using the dividend growth rate of 1.3%:
Year 2 dividend = (1 + 1.3%) x $1.64 = $1.66
We repeat this process for each year:
Year 3 dividend = (1 + 1.3%) x $1.66 = $1.68
Year 4 dividend = (1 + 1.3%) x $1.68 = $1.70
Year 5 dividend = (1 + 1.3%) x $1.70 = $1.73
Year 6 dividend = (1 + 1.3%) x $1.73 = $1.77
Therefore, the expected dividend in Year 6 is $1.77, so the correct answer is D ($1.77).

Question 9

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

Accepted Answer

The answer of Atlas Home Supply has paid a constant...

Question 10

The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

Accepted Answer

The answer of The Impulse Shopper recently paid an annual...

Question 11

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

Accepted Answer

Using the dividend discount model, we can calculate the stock price as follows:

Dividend in year 1: $1.62
Dividend growth rate: 2.1%
Required rate of return: 15.7%

Price = D1 / (r - g)

Price = $1.62 x (1 + 0.021) / (0.157 - 0.021)

Price = $1.65 / 0.136

Price = $12.16

Therefore, one share of this stock is worth $12.16 to an investor who requires a rate of return of 15.7%.

Question 12

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

Accepted Answer

Pink sheets are an electronic quotation system for over-the-counter (OTC) securities. Companies can list their stock on the pink sheets without having to meet listing requirements or filing financial statements with the SEC.

Question 13

Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid?

Accepted Answer

The answer of Lamey Gardens has a dividend growth rate...

Question 14

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year ($1.93), r is the required rate of return (11.75% or 0.1175), and g is the growth rate (1.6% or 0.016). Plugging in the values: P = 1.93 / (0.1175 - 0.016) = $19.01.

Question 15

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

Accepted Answer

The answer of This morning, you purchased a stock that...

Question 16

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment?

Accepted Answer

The correct answer is A because the present value of the future dividends is $9.63.

Question 17

The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?

Accepted Answer

To find the current value of the stock, we need to calculate the present value of all future dividends.

Using the dividend discount model:

PV = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + ...

where PV is the present value of the stock, r is the required return, and D1, D2, D3, ... are the expected dividends in each year.

Plugging in the given values:

PV = 1.23/(1+0.164) + 1.25/(1+0.164)^2 + (1.35/(0.164-0.02))/(1+0.164)^2

PV = 1.066 + 1.019 + 8.967

PV = $8.05

Therefore, the value of the stock at a required return of 16.4 percent is $8.05. Choice C is the correct answer.

Question 18

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

Accepted Answer

The answer of Braxton's Cleaning Company stock is selling for...

Question 19

The common stock of GT Enterprises is selling for $63.09 a share. The company pays a constant annual dividend and has a total return of 11.64 percent. What is the amount of the dividend?

Accepted Answer

The answer of The common stock of GT Enterprises is...

Question 20

The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend?

Accepted Answer

The answer of The common stock of Sweet Treats has...

Quiz 7: Equity Markets and Stock Valuation