Question 1

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Accepted Answer

The correct answer is A.The current value of Chambers common stock can be calculated using the Gordon Growth Model:P0 = D1 / (r - g)where:P0 is the current stock priceD1 is the next dividend paymentr is the required returng is the growth rateGiven:ROE = 20%Dividend payout ratio = 70%Last dividend (D0) = $2.00Required return (r) = 18%First, we need to calculate the growth rate (g):g = ROE x (1 - Dividend payout ratio)g = 20% x (1 - 70%)g = 6%Next, we can calculate the next dividend payment (D1):D1 = D0 x (1 + g)D1 = $2.00 x (1 + 6%)D1 = $2.12Finally, we can calculate the current stock price (P0):P0 = D1 / (r - g)P0 = $2.12 / (18% - 6%)P0 = $17.67Therefore, the current value of Chambers common stock is $17.67.

Question 2

Modem Development,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 10% for the next two years,at which point the dividends will begin to grow at a constant rate indefinitely.If the stock is selling for $50 today and the required return is 15%,what it the expected annual dividend growth rate after year two?

Accepted Answer

The correct answer is A because the expected annual dividend growth rate after year two is 3.365%. This can be calculated using the Gordon Growth Model, which states that the expected return on a stock is equal to the dividend yield plus the expected dividend growth rate. In this case, the dividend yield is 5% ($5/$50) and the expected dividend growth rate is 10% for the next two years. After year two, the dividend growth rate is expected to be 3.365%.

Question 3

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

Accepted Answer

The internal growth rate is calculated as the retention ratio multiplied by the return on equity. The retention ratio is 1 - dividend payout ratio = 1 - 0.6 = 0.4. The return on equity is net income divided by book value of equity = $2 million / $8 million = 0.25. Therefore, the internal growth rate is 0.4 * 0.25 = 0.10 or 10%.

Question 4

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

Accepted Answer

We can use the formula for present value of a single future cash flow: PV = FV / (1 + r)^n, where PV is present value, FV is future value, r is the required rate of return, and n is the number of years.
Plugging in the given values, we get:
PV = 75 / (1 + 0.16)^3
PV = 75 / 1.536
PV = 48.83
Rounding to two decimal places, the answer is $48.05, which is choice B.

Question 5

Butler Corp paid a dividend today of $5 per share.The dividend is expected to grow at a constant rate of 6.5% per year.If Butler Corp stock is selling for $50.00 per share,the stockholders' expected rate of return is

Accepted Answer

The answer of Butler Corp paid a dividend today of...

Question 6

I Sage,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

Accepted Answer

The answer of I Sage,whose common stock is currently selling...

Question 7

You observe Golden Flashes Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

Accepted Answer

The present value of the expected future cash flows (using the Gordon Growth Model) is calculated as $4 / (0.12 - 0.05) = $57.14, which is greater than the current stock price of $40. Therefore, you should purchase the stock.

Question 8

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g)is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?

Accepted Answer

The formula for the expected rate of return on a share of common stock growing at a constant rate (g) is given by (D₁/Vc) + g. This is because the expected return consists of two components: the dividend yield (D₁/Vc) and the capital gains yield (g) from the growth in the dividend. Option B correctly represents this formula. Option A is incorrect because it adds the growth rate to the entire dividend, rather than just the growth in the dividend. Option C is incorrect because it divides the dividend by the growth rate, which doesn't give a meaningful result. Option D is incorrect because it adds the current stock price to the growth rate, which again doesn't give a meaningful result.

Question 9

Berberich Corporation net income this year is $800,000.The company generally retains 35% of net income for reinvestment.The company's common equity currently has a book value of $5,000,000.They just paid a dividend of $1.37,and the required rate of return on this stock is 12%.Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.

Accepted Answer

The internal growth rate is calculated as the retention ratio (35%) multiplied by the return on equity (net income/book value of equity). The dividend growth rate is then used in the Gordon Growth Model to find the stock value: P = D1 / (r - g).

Question 10

Wallace Industries paid a dividend of $1.65 on its common stock yesterday.The dividends of Wallace Industries are expected to grow at 9% per year indefinitely.If the risk free rate is 3% and investors' risk premium on this stock is 8%,estimate the value of Wallace Industries stock 2 years from now.

Accepted Answer

The value of the stock can be estimated using the Gordon Growth Model (Dividend Discount Model). The formula is P = D1 / (r - g), where D1 is the dividend expected next year, r is the required rate of return, and g is the growth rate. The required rate of return is the risk-free rate plus the risk premium (3% + 8% = 11%). The dividend expected in 2 years is D0 * (1 + g)^2 = $1.65 * (1.09)^2 = $1.962. The stock price 2 years from now is P2 = D3 / (r - g) = $1.962 * (1.09) / (0.11 - 0.09) = $106.84.

Question 11

Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.

Accepted Answer

The answer of Johnstown Supply Corporation stock is currently selling...

Question 12

You are considering the purchase of Zee Company stock.You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year.You believe that you can sell the stock for $20.00 per share two years from now.If your required rate of return is 10 percent,what is the maximum price that you would pay for a share of Zee Company stock?

Accepted Answer

The answer of You are considering the purchase of Zee...

Question 13

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

Accepted Answer

This is the basic principle of efficient markets, where the market price reflects all available information and reflects the consensus view of investors on the expected rate of return. Investors who require a higher rate of return will not buy at the current market price, leading to a decrease in demand and eventually a decrease in price until the required rate of return for investors at the margin is equal to the expected rate of return implied by the market price.

Question 14

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

Accepted Answer

The answer of The price of DDS Corporation stock is...

Question 15

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Accepted Answer

The stock is valued as a perpetuity since the dividend is expected to remain constant at $3. The value is calculated as Dividend / Required Rate of Return = $3 / 0.10 = $30.00.

Question 16

Shara Miselle Co.just paid a dividend of $1.65 (D₀)on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shara Miselle stock.

Accepted Answer

We can use the Gordon Growth Model to calculate the current stock price:

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

= $1.65 / (0.11 - 0.03)

= $21.24

Therefore, the current value per share of Shara Miselle stock is $21.24. The correct choice is B.

Question 17

H.J.Corp.'s common stock paid $2.50 in dividends last year (D₀).Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Accepted Answer

To determine if a stock is a good investment, we need to calculate its intrinsic value based on the dividend growth rate and the required rate of return. The formula to calculate the intrinsic value of a stock is V₀ = (D₁ / (r - g)), where V₀ is the intrinsic value, D₁ is the next dividend payment, r is the required rate of return, and g is the dividend growth rate. Using this formula, we can calculate the intrinsic value of H.J. Corp's stock as follows:

V₀ = (2.5 * (1 + 0.12)) / (0.23 - 0.12) = $38.28

Comparing the intrinsic value of the stock ($38.28) to its current market price ($40.00), we see that the stock is overpriced. Therefore, the answer is C: No, the stock is overpriced, and we should not purchase it.

Question 18

Modem Development,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years,at which point the stock is expected to sell for $56.00.If investors require a rate of return on Modem's common stock of 18%,what should the stock sell for today?

Accepted Answer

We can use the dividend discount model to calculate the current stock price:

D1 = D0 x (1 + g) = $5.00 x (1 + 4%) = $5.20

D2 = D1 x (1 + g) = $5.20 x (1 + 4%) = $5.41

P2 = $56.00 (given)

Using the constant growth formula, we can solve for the current stock price:

P0 = D1 / (r - g) + D2 / (1 + r)^2 / (r - g)

Where:

r = 18% (required rate of return)
g = 4% (dividend growth rate)

P0 = $5.20 / (18% - 4%) + $5.41 / (1 + 18%)^2 / (18% - 4%) = $48.51

Therefore, the stock should sell for $48.51 today. The correct answer is B.

Question 19

Diana Ltd.paid a $2.50 per share dividend yesterday.The dividend is expected to grow at 10 percent per year for the foreseeable future.Diana Ltd.has a beta of 1.6,a standard deviation of returns of 30 percent,and a required return of 18%.What is the value of a share of Diana Ltd.common stock?

Accepted Answer

The answer of Diana Ltd.paid a $2.50 per share dividend...

Question 20

Creamy Custard common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Creamy Custard's stock?

Accepted Answer

The required rate of return on Creamy Custard's stock is 11.11%. This is calculated using the Gordon Growth Model, which is:Required rate of return = (Dividend / Current stock price) + Growth rateIn this case, the dividend is $4.60, the current stock price is $79.00, and the growth rate is 5%. Plugging these values into the formula, we get:Required rate of return = (4.60 / 79.00) + 0.05 = 11.11%

Quiz 8: The Valuation and Characteristics of Stock

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

Butler Corp paid a dividend today of $5 per share.The dividend is expected to grow at a constant rate of 6.5% per year.If Butler Corp stock is selling for $50.00 per share,the stockholders' expected rate of return is

I Sage,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

You observe Golden Flashes Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?

Wallace Industries paid a dividend of $1.65 on its common stock yesterday.The dividends of Wallace Industries are expected to grow at 9% per year indefinitely.If the risk free rate is 3% and investors' risk premium on this stock is 8%,estimate the value of Wallace Industries stock 2 years from now.

Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Shara Miselle Co.just paid a dividend of $1.65 (D₀) on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shara Miselle stock.

H.J.Corp.'s common stock paid $2.50 in dividends last year (D₀) .Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Diana Ltd.paid a $2.50 per share dividend yesterday.The dividend is expected to grow at 10 percent per year for the foreseeable future.Diana Ltd.has a beta of 1.6,a standard deviation of returns of 30 percent,and a required return of 18%.What is the value of a share of Diana Ltd.common stock?

Creamy Custard common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Creamy Custard's stock?

Quiz 8: The Valuation and Characteristics of Stock

Chambers Corporation's ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Chambers common stock if its required return is 18%?

Greenland Airlines has net income of $2 million this year.The book value of Greenland Airlines common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Greenland Airlines' internal growth rate?

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way,and if your required rate of return is 16% per year,how much is the stock worth today?

Butler Corp paid a dividend today of $5 per share.The dividend is expected to grow at a constant rate of 6.5% per year.If Butler Corp stock is selling for $50.00 per share,the stockholders' expected rate of return is

I Sage,whose common stock is currently selling for $12 per share,is expected to pay a $1.80 dividend,and sell for $14.40 one year from now.What are the dividend yield,growth rate,and total rate of return,respectively?

You observe Golden Flashes Common Stock selling for $40.00 per share.The next dividend is expected to be $4.00,and is expected to grow at a 5% annual rate forever.If your required rate of return is 12%,should you purchase the stock?

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D1 is the next dividend and Vc is the current value of the stock?

Wallace Industries paid a dividend of $1.65 on its common stock yesterday.The dividends of Wallace Industries are expected to grow at 9% per year indefinitely.If the risk free rate is 3% and investors' risk premium on this stock is 8%,estimate the value of Wallace Industries stock 2 years from now.

Johnstown Supply Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Johnstown Supply Corporation stock.

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

NewAge,Inc.paid a dividend yesterday of $2 per share.NewAge management expects the dividend to increase next year to $3 annually.If the dividend is expected to stay at $3 per year for the foreseeable future,what is the value of the stock to an investor with a required rate of return of 10%?

Shara Miselle Co.just paid a dividend of $1.65 (D0) on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shara Miselle stock.

H.J.Corp.'s common stock paid $2.50 in dividends last year (D0) .Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Diana Ltd.paid a $2.50 per share dividend yesterday.The dividend is expected to grow at 10 percent per year for the foreseeable future.Diana Ltd.has a beta of 1.6,a standard deviation of returns of 30 percent,and a required return of 18%.What is the value of a share of Diana Ltd.common stock?

Creamy Custard common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Creamy Custard's stock?

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following,where D₁ is the next dividend and Vc is the current value of the stock?

Shara Miselle Co.just paid a dividend of $1.65 (D₀) on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shara Miselle stock.

H.J.Corp.'s common stock paid $2.50 in dividends last year (D₀) .Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?