Question 1

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's expected dividend yield is closest to:

Accepted Answer

The expected dividend yield is calculated as the dividend divided by the current stock price. So, $1.20 / $30 = 0.04 or 4.00%.

Question 2

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's equity cost of capital is closest to:

Accepted Answer

The equity cost of capital can be calculated using the formula: (Dividend + Price Increase) / Current Price. Here, it is ($1.20 + ($33 - $30)) / $30 = $4.20 / $30 = 0.14 or 14.0%.

Question 3

The Sisyphean Company's common stock is currently trading for $25.00 per share.The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%.If the dividend payout rate is expected to remain constant,then the expected growth rate in the Sisyphean Company's earnings is closest to:

Accepted Answer

C

Question 4

Which of the following statements is FALSE?

Accepted Answer

The general dividend discount model is used for valuing the stock of a firm with rapid or changing growth. Therefore, statement A is false. Statements B, C, and D are all true. As firms mature, their growth rate slows down, the dividend discount model values the stock based on future dividends, and the simplest forecast for future dividends assumes they will grow at a constant rate forever.

Question 5

Which of the following formulas is INCORRECT?

Accepted Answer

The answer of Which of the following formulas is INCORRECT?
...

Question 6

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Accepted Answer

The answer of NoGrowth industries presently pays an annual dividend...

Question 7

Von Bora Corporation (VBC)is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBC stock is closest to:

Accepted Answer

The correct answer is A. The value of a share of VBC stock is closest to $25.00. This is calculated using the dividend discount model, which takes into account the expected dividend, the growth rate of the dividend, and the equity cost of capital.

Question 8

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Accepted Answer

The dividend yield is calculated as the dividend divided by the current share price: $0.75 / $25 = 3.0%. The equity cost of capital is the sum of the dividend yield and the capital gain yield: 3.0% + (($26.75 - $25) / $25) = 10.0%.

Question 9

You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The value of a share of KTI's stock is closest to:

Accepted Answer

To determine the value of KTI's stock using the dividend discount model, we can use the formula:

Value of stock = Dividend / (Cost of equity - Growth rate of dividends)

Here, the dividend is $1.50 (as given in the problem). The growth rate of dividends can be calculated as the product of the earnings retention ratio and the return on new investments:

Retention ratio = (Earnings - Dividend) / Earnings = (3 - 1.5) / 3 = 0.5
Growth rate of dividends = Retention ratio x Return on new investments = 0.5 x 0.15 = 0.075

Substituting these values in the formula, we get:

Value of stock = 1.5 / (0.12 - 0.075) = $33.33

Therefore, the closest value of a share of KTI's stock is $33.35 (option C).

Question 10

You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:

Accepted Answer

The price of the stock is calculated using the dividend discount model considering the retention and reinvestment strategy. The growth rate during the first three years is 20% (since all earnings are retained and reinvested at 20%). For the next two years, the growth rate is 10% (50% retention at 20% return), and thereafter, it is 5% (25% retention at 20% return). The price is calculated by discounting the expected future dividends back to the present value using the equity cost of capital of 12%.

Question 11

Which of the following statements regarding profitable and unprofitable growth is FALSE?

Accepted Answer

Cutting dividends to invest more does not necessarily guarantee an increase in stock price. It depends on the profitability and success of the new investments made with the retained earnings. Therefore, statement A is false.

Question 12

Which of the following statements is FALSE?

Accepted Answer

Total return equals earnings multiplied by the dividend payout rate is a false statement. Total return includes both the dividend yield and capital gains or losses, which are based on changes in the stock price.

Question 13

Use the following information to answer the question(s)below.
Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33.
-Rearden's expected capital gains yield is closest to:

Accepted Answer

The expected capital gains yield is calculated as the change in stock price divided by the initial stock price. The expected price change is $33 - $30 = $3. The capital gains yield is $3 / $30 = 0.10 or 10.0%.

Question 14

You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The expected growth rate for KTI's dividends is closest to:

Accepted Answer

We can use the Gordon growth model to calculate the expected growth rate of KTI's dividends:

Expected growth rate = Retention rate x Return on new investments
Retention rate = 1 - Payout ratio = 1 - $1.50/$3 = 0.50

Expected growth rate = 0.50 x 15% = 7.5%

Therefore, the closest answer is B) 7.5%.

Question 15

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.Prior to this announcement,JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.With the new expansion,JRN's dividends are expected to grow at 8% per year indefinitely.Assuming that JRN's risk is unchanged by the expansion,the value of a share of JRN after the announcement is closest to:

Accepted Answer

The answer of JRN Enterprises just announced that it plans...

Question 16

Which of the following is NOT a way that a firm can increase its dividend?

Accepted Answer

Increasing the retention rate means the firm is keeping more of its earnings rather than distributing them as dividends, which would not increase the dividend.

Question 17

Which of the following formulas is INCORRECT?

Accepted Answer

The answer of Which of the following formulas is INCORRECT?
...

Question 18

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%.Luther Industries dividends are expected to grow at a constant rate indefinitely.The growth rate of Luther's dividends is closest to:

Accepted Answer

The growth rate of dividends can be calculated using the formula: Cost of Equity = Dividend Yield + Growth Rate. Rearranging gives Growth Rate = Cost of Equity - Dividend Yield = 12% - 4.5% = 7.5%.

Question 19

Which of the following statements is FALSE?

Accepted Answer

The statement in option D is false. According to the constant dividend growth model, the value of the firm depends on the current dividend level multiplied by the growth rate, divided by the equity cost of capital minus the growth rate.

Question 20

Which of the following statements is FALSE?

Accepted Answer

During periods of high growth, firms often reinvest their earnings in the business rather than pay out dividends. It is not usual for them to pay out 100% of earnings as dividends during such periods.

Quiz 9: Valuing Stocks

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's expected dividend yield is closest to:

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's equity cost of capital is closest to:

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

NoGrowth industries presently pays an annual dividend of $1.50 per share and it is expected that these dividend payments will continue indefinitely.If NoGrowth's equity cost of capital is 12%,then the value of a share of NoGrowth's stock is closest to:

Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year.If you expect VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%,then the value of a share of VBC stock is closest to:

Nielson Motors has a share price of $25 today.If Nielson Motors is expected to pay a dividend of $0.75 this year,and its stock price is expected to grow to $26.75 at the end of the year,then Nielson's dividend yield and equity cost of capital are:

Which of the following statements regarding profitable and unprofitable growth is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. Rearden Metals has a current stock price of $30 share,is expected to pay a dividend of $1.20 in one year,and its expected price right after paying that dividend is $33. -Rearden's expected capital gains yield is closest to:

Which of the following is NOT a way that a firm can increase its dividend?

Which of the following formulas is INCORRECT?

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%.Luther Industries dividends are expected to grow at a constant rate indefinitely.The growth rate of Luther's dividends is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?