Question 1

Whistle Stop pays a constant annual dividend of $4 on its stock. The company will maintain this dividend for the next 3 years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 15.6 percent?

Accepted Answer

The answer of Whistle Stop pays a constant annual dividend...

Question 2

Home Parties is paying an annual dividend of $1.78 every other year. The last dividend was paid last year. The firm will continue this policy until two more dividend payments have been paid. Three years after the last normal dividend payment, the company plans to pay a final liquidating dividend of $32 per share. What is the current market value of this stock if the required return is 14.7 percent?

Accepted Answer

The answer of Home Parties is paying an annual dividend...

Question 3

JL Co. stock currently sells for $64 per share and the required return is 12 percent. The total return is evenly divided between the capital gains yield and the dividend yield. What is the current dividend per share if it's the company's policy to always maintain a constant growth rate in its dividends?

Accepted Answer

Given that the total return is evenly divided between the capital gains yield and the dividend yield, and the required return is 12 percent, each yield contributes 6 percent. The dividend yield can be calculated as the dividend per share divided by the current stock price. Therefore, if the dividend yield is 6 percent (0.06), and the stock price is $64, the current dividend per share is $64 * 0.06 = $3.84. However, since the dividends are expected to grow at a constant rate (which is equal to the capital gains yield of 6 percent), we need to find the dividend that, when grown at 6 percent, would result in a price of $64 when discounted back at the required return of 12 percent. The correct calculation involves finding the dividend that fits this growth model, which is $3.62. This accounts for both the growth in dividends and the required return on investment.

Question 4

AC Electric just paid its annual dividend of $2.42. The firm plans to increase its dividend by 2.5 percent for the next 3 years and then maintain a constant 2 percent rate of dividend growth. The required return is 12.5 percent. What is the current value per share of this stock?

Accepted Answer

To find the current value per share of the stock, we use the dividend discount model for a stock with a changing growth rate. First, calculate the dividends for the next three years, then calculate the present value of these dividends and the present value of the stock price at the end of year 3, discounted back to the present.1. Calculate future dividends:- Year 1: $2.42 * (1 + 2.5%) = $2.4805- Year 2: $2.4805 * (1 + 2.5%) = $2.5425- Year 3: $2.5425 * (1 + 2.5%) = $2.60612. Calculate the stock price at the end of year 3 using the Gordon Growth Model, assuming dividends grow at a constant 2% after year 3:$$ P_3 = \frac{D_4}{r - g} = \frac{2.6061 \times (1 + 2\%)}{0.125 - 0.02} = \frac{2.6582}{0.105} = 25.3162 $$3. Calculate the present value of the dividends and the stock price at the end of year 3:$$ PV = \frac{2.4805}{(1 + 0.125)} + \frac{2.5425}{(1 + 0.125)^2} + \frac{2.6061 + 25.3162}{(1 + 0.125)^3} $$$$ PV = \frac{2.4805}{1.125} + \frac{2.5425}{1.2656} + \frac{27.9223}{1.4227} $$$$ PV = 2.2044 + 2.0081 + 19.6237 = 23.8362 $$Rounding to two decimal places, the current value per share of the stock is approximately $23.82.

Question 5

The Sly Fox pays a constant dividend of $1.46 a share. The company announced today that it will continue to pay the dividend for another 2 years and then in Year 3 it will pay a final liquidating dividend of $15.25 a share. What is one share of this stock worth today at a required return of 18.5 percent?

Accepted Answer

The answer of The Sly Fox pays a constant dividend...

Question 6

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a dividend of $.25 per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?

Accepted Answer

The answer of New Products pays no dividend at the...

Question 7

Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent?

Accepted Answer

The answer of Kay's Sewing Loft is going to reduce...

Question 8

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

Accepted Answer

The answer of Your local toy store just announced its...

Question 9

Morris Companies preferred stock pays a constant $5.75 dividend every year. What is the required return if the stock price is $54.09 per share?

Accepted Answer

The answer of Morris Companies preferred stock pays a constant...

Question 10

A preferred stock pays an annual dividend of $5.40 and sells for $63.20 a share. What is the rate of return?

Accepted Answer

The rate of return is calculated by dividing the annual dividend by the price per share: $5.40 / $63.20 = 0.0854, or 8.54 percent.

Question 11

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent?

Accepted Answer

To find the present value of the stock, we calculate the present value of the dividends for the first three years and the present value of the perpetuity starting from year 4 onwards. The formula for the present value of a perpetuity is $PV = \frac{D}{r}$, where $D$ is the dividend and $r$ is the discount rate. However, since the perpetuity starts in year 4, we need to discount it back to today's value.1. Year 1 Dividend: $\frac{1.45}{(1 + 0.117)^1} = 1.298$2. Year 2 Dividend: $\frac{1.50}{(1 + 0.117)^2} = 1.199$3. Year 3 Dividend: $\frac{1.53}{(1 + 0.117)^3} = 1.090$For the perpetuity starting in year 4:- Perpetuity value at year 4: $\frac{1.60}{0.117} = 13.675$- Discounted back to today (PV of perpetuity): $\frac{13.675}{(1 + 0.117)^3} = 9.853$Adding these up:- Total value = $1.298 + 1.199 + 1.090 + 9.853 = 13.440$Rounding to two decimal places, the stock is worth approximately $13.44 today, which is closest to option E, $13.41.

Question 12

The Grist Mill just paid its annual dividend of $1.58 per share. The dividends are expected to grow at 2.7 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require an annual return of 15.2 percent?

Accepted Answer

First, we need to calculate the expected dividend payment in year 7, using the formula:

Expected dividend payment in year 7 = Annual dividend payment x (1 + growth rate)^years

Expected dividend payment in year 7 = $1.58 x (1 + 0.027)^7 = $1.95

Next, we can use the Gordon Growth Model formula to calculate the price of the stock in year 7:

Price in year 7 = Expected dividend payment in year 7 / (Required return - Dividend growth rate)

Price in year 7 = $1.95 / (0.152 - 0.027) = $15.64

Therefore, the best choice is D) $15.64.

Question 13

Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

Accepted Answer

The correct answer is A because the present value of the dividends is $7.33. The dividend is $4.20, the growth rate is -25%, and the required rate of return is 18%.

Question 14

Next year, Jensen's will pay an annual dividend of $3.32 per share. The company has been reducing its dividends by 7 percent annually. What is this stock worth today if the required return is 15.5 percent?

Accepted Answer

The dividend in the next year = $3.32
The required return = 15.5%
The growth rate of dividends = -7%
Applying the constant growth formula:
P0 = D1 / (r - g)
where,
D1 = next year dividend = $3.32
r = required return = 15.5%
g = growth rate of dividends = -7%
P0 = $3.32 / (15.5% - (-7%))
P0 = $3.32 / 22.5%
P0 = $14.76

Question 15

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

Accepted Answer

The correct answer is A.The present value of the dividends over the next three years is:PV = $3.80 / (1 + 0.125)^1 + $4.10 / (1 + 0.125)^2 + $4.25 / (1 + 0.125)^3 = $11.02The present value of the dividends from year 4 onwards is:PV = $4.25 * (1 + 0.0325)^4 / (0.125 - 0.0325) = $34.90The total present value of the dividends is:PV = $11.02 + $34.90 = $45.92The present value of the stock is:PV = $45.92 / (1 + 0.125)^3 = $42.92

Question 16

AOK preferred stock pays an annual dividend of $6.50. What is the current price of this stock at a discount rate of 8.9 percent?

Accepted Answer

We can use the dividend discount model to find the price of the stock:
P = D/r
where P is the stock price, D is the annual dividend, and r is the discount rate.
Plugging in the given values, we get:
P = 6.5/0.089
P ≈ 73.03
Therefore, the current price of the stock is approximately $73.03. The correct answer is D.

Question 17

J&J Foods wants to issue 5.4 percent preferred stock with a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a return of 8.2 percent. What should the offer price be?

Accepted Answer

The answer of J&J Foods wants to issue 5.4 percent...

Question 18

A preferred stock sells for $63.60 a share and provides a return of 8.40 percent. What is the amount of the dividend per share?

Accepted Answer

To find the dividend per share, we need to use the formula:
Dividend per share = Annual dividend / Number of shares

We are given that the preferred stock provides a return of 8.40 percent. This return is the annual dividend yield. Therefore, we can set up the equation as:

0.0840 = Annual dividend / $63.60

Solving for the annual dividend, we get:
Annual dividend = 0.0840 x $63.60 = $5.34

Therefore, the dividend per share is $5.34. The closest answer choice is C ($5.34), so that is the correct answer.

Question 19

The next dividend payment by HG Enterprises will be $1.82 per share with future increases of 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield?

Accepted Answer

The answer of The next dividend payment by HG Enterprises...

Question 20

DT Motors paid its first annual dividend yesterday in the amount of $.15 a share. The company plans to double the dividend in each of the next 3 years. Starting in Year 4, the firm plans to pay $1.50 a share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 13.8 percent?

Accepted Answer

The answer of DT Motors paid its first annual dividend...

Quiz 8: Stock Valuation