Question 1

Jia's Kitchen Stuff has recently sold 1,000 shares of preferred stock.What is the per share value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75?

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The answer of Jia's Kitchen Stuff has recently sold 1,000...

Question 2

The Oxford Heating Company has been very successful in the past four years.Over these years,it paid common stock dividend of $4 in the first year,$4.20 in the second year,$4.41 in the third year,and its most recent dividend was $4.63.The company wishes to continue this dividend growth indefinitely.What is the value of the company's stock if the required rate of return is 12 percent?

Accepted Answer

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Question 3

Harry Corporation's common stock currently sells for $179.85 per share.Harry paid a dividend of $10.18 yesterday,and dividends are expected to grow at a constant rate of 6 percent forever.If the required rate of return is 12 percent,what will Harry Corporation's stock sell for one year from now,immediately after it pays its next dividend?

Accepted Answer

The stock price one year from now can be calculated using the Gordon Growth Model: P1 = D1 / (r - g), where D1 is the dividend next year ($10.18 * 1.06), r is the required rate of return (12%), and g is the growth rate (6%). This gives P1 = $190.64.

Question 4

Table 7.1 
-Calculate the estimated dividend for 2020.(See Table 7.1)

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The answer of Table 7.1 
-Calculate the estimated dividend for...

Question 5

Table 7.1 
-The required return is 17 percent.Using the Gordon model,calculate the per share value of the stock for 2020 (assume the 2020 dividend comes at the end of the year and you want the value of the stock at the beginning of the year).(See Table 7.1)

Accepted Answer

The answer of Table 7.1 
-The required return is 17...

Question 6

Tina's Medical Equipment Company paid a $2.25 common stock dividend last year.The company's policy is to allow its dividend to grow at 5 percent per year indefinitely.What is the value of the stock if the required rate of return is 8 percent?

Accepted Answer

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Question 7

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and,thus,has considered maintaining its dividend payment at $2.50 indefinitely.What is the value of its common stock if the required rate of return is 8.5 percent?

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The answer of Aunt Tilly's Fur Company has been experiencing...

Question 8

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000.She expects to receive annual dividends of $400 indefinitely from those shares.Assuming a discount rate of 8 percent,how does the price Angel paid compare to the value of the stock?

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The answer of Angel recently purchased a block of 100...

Question 9

In response to the stock market's reaction to its dividend policy,the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year.The firm's most recent dividend is $3.25 and the required rate of interest is 9 percent.What is the maximum you would be willing to pay for a share of the stock?

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Question 10

Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent.Assuming the same dividend will be paid indefinitely,calculate the value of a share of common stock assuming a zero growth rate of dividends.

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Question 11

The Bradshaw Company's most recent dividend was $6.75.The historical dividend payment by the company shows a constant growth rate of 5 percent per year.What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

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Question 12

Ted has 10 shares of Grand Company.Based on the company's dividend policy,Ted will receive a total of $450 a year in perpetuity.What is the value of each share if the appropriate discount rate is 8 percent?

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The answer of Ted has 10 shares of Grand Company.Based...

Question 13

The board of directors of Ride World,Inc.has declared $5.00 common stock dividend,payable one year from today,and accepted a plan to freeze the dividend at $5 per year indefinitely.What is the value of the Ride World's common stock if the required rate of interest is 15 percent?

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Question 14

Tangshan China Company's stock is currently selling for $80.00 per share.The expected dividend one year from now is $4.00 and the required return is 13 percent.What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

Accepted Answer

The dividend growth rate can be found using the Gordon Growth Model (Dividend Discount Model for a perpetuity), which is P = D / (r - g), where P is the price, D is the dividend, r is the required return, and g is the growth rate. Rearranging the formula to solve for g gives g = r - (D / P). Substituting the given values, g = 0.13 - (4 / 80) = 0.13 - 0.05 = 0.08 or 8%.

Question 15

Table 7.1 
-Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1.Calculate the growth rate of these dividends.

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The answer of Table 7.1 
-Xiao Xin owns stock in...

Question 16

Jia's Fashions recently paid a $2 annual dividend.The company is projecting that its dividends will grow by 20 percent next year,12 percent annually for the two years after that,and then at 6 percent annually thereafter.Based on this information,how much should Jia's Fashions common stock sell for today if her required return is 10.5%?

Accepted Answer

To calculate the present value of the future dividend payments, we can use the dividend discount model:

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

where PV is the present value of the stock, D1 is the next year dividend payment, r is the required return, and n is the number of years.

Using the information given in the question, we can calculate the present value of the dividend payments as follows:

PV = $2.40/(1.105) + $2.688/(1.105)^2 + $3.0111/(1.105)^3 + ... + $60.227/(1.105)^10

PV = $54.194

Therefore, Jia's Fashions common stock should sell for $59.16 today, which is closest to option C.

Question 17

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely.Assuming Tangshan China's most recent dividend was $5.50,what is the required rate of return on Tangshan's stock?

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Question 18

Julie's X-Ray Company paid $2.00 per share in common stock dividends last year.The company will allow its dividend to grow at 5 percent for 4 years,and after that the rate of growth will be 3 percent forever.What is the value of the stock if the required rate of return is 8 percent?

Accepted Answer

The answer of Julie's X-Ray Company paid $2.00 per share...

Question 19

Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par).Similar risk preferred stocks are yielding an 11.5 percent annual rate of return.
(a)What is the current value of the outstanding preferred stock?
(b)What will happen to price if the risk-free rate increases? Explain.

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Question 20

Daniel Custom Cycles' common stock currently pays no dividends.The company plans to begin paying dividends beginning 3 years from today.The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter.Given a required return of 15 percent,what would you pay for the stock today?

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Quiz 7: Stock Valuation