Question 1

China Imports paid a $1.50 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if the appropriate discount rate is 12%?

Accepted Answer

The answer of China Imports paid a $1.50 per share...

Question 2

Main Street Tool & Die is in a downsizing mode. The company paid a $2 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. You place a required rate of return of 18% on this particular stock given the company's situation. What is one share of this stock worth to you today?

Accepted Answer

The correct answer is A.The stock is worth $2.29 today. This is calculated by dividing the last dividend paid ($2) by the required rate of return (18%).

Question 3

Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%.

The price of Bradley Broadcasting stock today should be:

Accepted Answer

The price of Bradley Broadcasting stock today can be calculated using the dividend discount model for a stock that pays dividends for a finite period and then grows at a constant rate indefinitely. The formula to calculate the present value of dividends for the first three years is:$$ P_0 = \frac{D_1}{(1+r)^1} + \frac{D_2}{(1+r)^2} + \frac{D_3}{(1+r)^3} + \frac{D_3 \times (1+g)}{r-g} \times \frac{1}{(1+r)^3} $$Where:- $P_0$ is the price of the stock today.- $D_1$, $D_2$, $D_3$ are the dividends for years 1, 2, and 3 respectively.- $r$ is the required rate of return (10% or 0.10).- $g$ is the constant growth rate of dividends after year 3 (4% or 0.04).Plugging in the given values:- $D_1 = $1.10$- $D_2 = $1.21$- $D_3 = $1.331$- $r = 0.10$- $g = 0.04$$$ P_0 = \frac{1.10}{(1+0.10)^1} + \frac{1.21}{(1+0.10)^2} + \frac{1.331}{(1+0.10)^3} + \frac{1.331 \times (1+0.04)}{0.10-0.04} \times \frac{1}{(1+0.10)^3} $$$$ P_0 = \frac{1.10}{1.10} + \frac{1.21}{1.21} + \frac{1.331}{1.331} + \frac{1.331 \times 1.04}{0.06} \times \frac{1}{1.331} $$$$ P_0 = 1 + 1 + 1 + \frac{1.38424}{0.06} $$$$ P_0 = 3 + 23.07067 $$$$ P_0 \approx 20.33 $$Therefore, the correct answer is $20.33, which corresponds to choice C.

Question 4

Shares of Blue Dye, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Blue Dye have been increasing at a rate of 2.4% and are expected to continue at this rate. What is the expected amount of the next dividend?

Accepted Answer

The answer of Shares of Blue Dye, Inc. are currently...

Question 5

Biogenetics, Inc. plans to retain and reinvest all of its earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate annually thereafter. Given a required return of 15%, what the stock should sell for today?

Accepted Answer

The stock price today is the present value of the dividends starting in year 31. The dividend in year 31 is $12, growing at 6% annually. The price at year 30 is calculated using the Gordon Growth Model: P30 = D31 / (r - g) = $12 / (0.15 - 0.06) = $133.33. The present value of this price is then discounted back 30 years: P0 = $133.33 / (1.15)^30 = $2.01.

Question 6

How much are you willing to pay for one share of stock if the company just paid a $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?

Accepted Answer

The answer of How much are you willing to pay...

Question 7

Jessica's Home Interiors offers a common stock that pays an annual dividend of $1.60 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock today if you want to earn a 9% return on your investments?

Accepted Answer

The correct answer is A because $17.78 is the present value of a perpetuity that pays $1.60 per year at a 9% discount rate.

Question 8

The common stock of Singer Machines pays an annual dividend that is expected to increase by 6% annually. The stock commands a market rate of return of 11% and sells for $54.20 a share. What is the expected amount of the next dividend?

Accepted Answer

The answer of The common stock of Singer Machines pays...

Question 9

Textile Importers paid a $1.60 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if your required rate of return is 13.5%?

Accepted Answer

The answer of Textile Importers paid a $1.60 per share...

Question 10

Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indefinitely. Returns on the stock of firms like NoGro are currently running 15%. What is the value of one share of stock?

Accepted Answer

The value of a share of stock that pays a perpetual dividend can be calculated using the formula: Value = Dividend / Required Rate of Return. Here, the dividend is $2.90 and the required rate of return is 15% or 0.15. So, the value = $2.90 / 0.15 = $19.33.

Question 11

Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?

Accepted Answer

The answer of Can't Hold Me Back, Inc. is preparing...

Question 12

Rosebud Florists pays a constant dividend of $1.50 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.5%?

Accepted Answer

The value of the stock today is the present value of the dividends for the next two years. The present value of the dividends is calculated as follows: PV = $1.50 / (1 + 0.075)^1 + $1.50 / (1 + 0.075)^2 = $1.3953 + $1.2977 = $2.693. Rounded to two decimal places, this is $2.69.

Question 13

The Johnson Company just paid an annual dividend of $1.60. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a 9% rate of return?

Accepted Answer

The price of a stock with constant dividends can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, Price = $1.60 / 0.09 = $17.78.

Question 14

F & D Industry's common stock sells for $43.05 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 10%. What is the amount of the last dividend paid by F & D?

Accepted Answer

The dividend discount model (DDM) can be used to find the last dividend: P = D0 * (1 + g) / (r - g). Solving for D0: $43.05 = D0 * (1.05) / (0.10 - 0.05), D0 = $2.05.

Question 15

If a company has a current stock price of $45, an EPS of $3/share; EPS growth rate of 10% and the investors rate of return is 15%, calculate the cash cow price.

Accepted Answer

The cash cow price can be calculated using the formula: Cash Cow Price = EPS / Required Rate of Return. Here, EPS is $3 and the required rate of return is 15% or 0.15. Therefore, Cash Cow Price = $3 / 0.15 = $20.

Question 16

The Sister's Market is preparing to pay its first dividends. It is going to pay $.60, $1.10, and $1.50 a share over the next 3 years, respectively. After that, the company has stated that the annual dividend will be $1.98 per share indefinitely. What is this stock worth to you per share if you demand a 9% rate of return?

Accepted Answer

To calculate the value of the stock, we use the dividend discount model for a stock with a growing dividend, which in this case includes specific dividends for the first three years and a perpetual dividend thereafter. The value of the stock (V) can be calculated as the present value of the dividends for the first three years plus the present value of the perpetual dividends starting from year 4. The formula for the present value of a perpetuity starting from year 4 is $ \frac{D_4}{r} $, where $D_4$ is the dividend in year 4, and $r$ is the required rate of return. However, since this value is in year 4, we need to discount it back to the present value.1. Calculate the present value of the dividends for the first three years:   - Year 1: $ \frac{0.60}{(1+0.09)^1} $   - Year 2: $ \frac{1.10}{(1+0.09)^2} $   - Year 3: $ \frac{1.50}{(1+0.09)^3} $2. Calculate the present value of the perpetual dividend starting from year 4:   - The perpetual dividend is $ \frac{1.98}{0.09} $, but this needs to be discounted back to present value: $ \frac{\frac{1.98}{0.09}}{(1+0.09)^3} $Adding these values together gives the total value of the stock. When you perform these calculations, the result is closest to option D, $19.62. This calculation accounts for the time value of money, discounting future dividends back to their present value at the required rate of return of 9%.

Question 17

Suppose the Pale Hose Corp. is expected to pay a dividend next year of $1.75 per share. Both sales and profits for Pale Hose are expected to grow at a rate of 15% for the following two years and then at 2% per year thereafter indefinitely. Dividend growth is expected to match sales growth. If the required return is 14%, what is the value of a share of Pale Hose?

Accepted Answer

The value of the stock is calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years, then use the Gordon Growth Model for the terminal value from year 3 onwards. Discount all cash flows to present value using the required return of 14%.

Question 18

A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What is the dividend the firm is expected to pay in one year if the current stock price is $40?

Accepted Answer

The dividend yield is calculated as the annual dividend divided by the current stock price. Given a dividend yield of 6% and a current stock price of $40, the expected dividend in one year is calculated as 0.06 * $40 = $2.40.

Question 19

A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What dividend did the firm just pay if the current stock price is $40?

Accepted Answer

The answer of A firm's stock has a required return...

Question 20

A stock pays a constant annual dividend and sells for $31.11 a share. If the rate of return on this stock is 9%, what is the dividend amount?

Accepted Answer

The answer of A stock pays a constant annual dividend...

Quiz 8: Stock Valuation