Question 1

Because of a lucky breakthrough, Philadelphia Pharmaceutical's current dividend per share of $2.00 is expected to grow at a very high 32 percent per year for the next three years and then to grow at a more normal 6 percent per year. What is the value of a Philadelphia share if the investors' expected return is 20 percent?

Accepted Answer

The answer of Because of a lucky breakthrough, Philadelphia Pharmaceutical's...

Question 2

Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received a $5 per share dividend. What was her percentage return?

Accepted Answer

The answer of Jan bought a stock at $70 per...

Question 3

Are growth rate models such oversimplifications of reality that they're useless?

Accepted Answer

The answer of Are growth rate models such oversimplifications of...

Question 4

What is the value of a share of Wisconsin Gas $2.55 preferred stock if the investor's expected return is 8 percent?

Accepted Answer

The answer of What is the value of a share...

Question 5

Match between columns
                        Premises: Cumulative voting flows

Accepted Answer

The Answer of A procedure to make minority representation on is...

Question 6

The purpose of preemptive rights is to allow common stockholders to buy new shares at a lower price than currently offered on the open market.

Accepted Answer

Preemptive rights allow existing shareholders to maintain their proportional ownership in a company when new shares are issued, by giving them the opportunity to buy additional shares before the public, but not necessarily at a lower price.

Question 7

Preferred stock is said to be a hybrid security having similarities to both common stock and bonds. Explain the similarities and differences between preferred stock, bonds, and common stock.

Accepted Answer

The answer of Preferred stock is said to be a...

Question 8

Match between columns
                        Premises: Technical analysis

Accepted Answer

The Answer of A procedure to make minority representation on is...

Question 9

Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter.   If the required rate of return is 9%, then what is the current value of the stock?

Accepted Answer

The current value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth) as follows: P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $1 * (1 + 0.05) = $1.05, r = 0.09, and g = 0.05. Thus, P = $1.05 / (0.09 - 0.05) = $26.25.

Question 10

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

Accepted Answer

The answer of The valuation processes for stocks and bonds...

Question 11

Janet Lee is considering purchasing shares in DM Designs. The share price is currently $64. Alternatively, Janet can buy an out of the money call option with a striking price of $65, that is currently priced at $2.25. Janet expects the stock price to rise to $68. What is the difference between the stock's return on investment and the option's return on investment?

Accepted Answer

The answer of Janet Lee is considering purchasing shares in...

Question 12

Monty's issued an 8% preferred stock with a $100 par value.   The stock currently is yielding 6%.   What is the current price?

Accepted Answer

To find the current price of the preferred stock, we need to use the formula: Current Price = Annual Dividend / Required Return. The annual dividend is $8 (8% of $100), and the required return is 6%. Thus, Current Price = $8 / 0.06 = $133.33, which rounds down to answer choice C.

Question 13

When applying the Constant Growth Model, the required return must be greater than the rate of growth otherwise the results will be meaningless.

Accepted Answer

The constant growth model assumes that the dividend growth rate will remain constant into perpetuity, so it is crucial that the required return (also known as the discount rate or cost of equity) is higher than the dividend growth rate. This is because the model discounts the future dividend payments back to their present value using the required return, and if the required return is lower than the growth rate, the denominator in the formula (the required return minus the growth rate) will be negative, resulting in a negative present value of the stock. Therefore, the required return must be greater than the rate of growth for the model to produce a meaningful valuation.

Question 14

The cash flows that come from investing in stocks and bonds appear similar in that they both consist of a stream of relatively small payments followed by a single larger payment. The smaller payments are dividends for stocks and interest for bonds, while the larger ones are the eventual selling price of stock and the return of principal for a bond. Critically evaluate this apparent similarity

Accepted Answer

The answer of The cash flows that come from investing...

Question 15

George Franks can buy shares of Ace Rocket Launcher for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any ARL? George feels that 18 percent is the appropriate required rate of return.

Accepted Answer

The answer of George Franks can buy shares of Ace...

Question 16

Atwater Inc. recently paid a dividend of $2.25 and the stock closed at $74.35 today.   What is the dividend yield? ​

Accepted Answer

The dividend yield is calculated by dividing the annual dividend by the stock price. Here, $2.25 / $74.35 = 0.0303, or approximately 3%.

Question 17

The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?

Accepted Answer

The answer of The Rich Company has a dividend growth...

Question 18

Justin Freez purchased a put option on General Auto's common stock at $2.90. The put has a striking price of $40 and General Auto's common stock is priced at $42.00. What is the most that Justin can lose on the put option purchase?

Accepted Answer

The answer of Justin Freez purchased a put option on...

Question 19

Match between columns
                        Premises: Cumulative feature

Accepted Answer

The Answer of A procedure to make minority representation on is...

Question 20

Match between columns
                        Premises: Fundamental analysis

Accepted Answer

The Answer of A procedure to make minority representation on is...

Quiz 8: The Valuation and Characteristics of Stock

Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received a $5 per share dividend. What was her percentage return?

Are growth rate models such oversimplifications of reality that they're useless?

What is the value of a share of Wisconsin Gas $2.55 preferred stock if the investor's expected return is 8 percent?

Match the following:

The purpose of preemptive rights is to allow common stockholders to buy new shares at a lower price than currently offered on the open market.

Preferred stock is said to be a hybrid security having similarities to both common stock and bonds. Explain the similarities and differences between preferred stock, bonds, and common stock.

Match the following:

Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter. If the required rate of return is 9%, then what is the current value of the stock?

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

Monty's issued an 8% preferred stock with a $100 par value. The stock currently is yielding 6%. What is the current price?

When applying the Constant Growth Model, the required return must be greater than the rate of growth otherwise the results will be meaningless.

George Franks can buy shares of Ace Rocket Launcher for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any ARL? George feels that 18 percent is the appropriate required rate of return.

Atwater Inc. recently paid a dividend of $2.25 and the stock closed at $74.35 today. What is the dividend yield?

The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?

Justin Freez purchased a put option on General Auto's common stock at $2.90. The put has a striking price of $40 and General Auto's common stock is priced at $42.00. What is the most that Justin can lose on the put option purchase?

Match the following:

Match the following:

Quiz 8: The Valuation and Characteristics of Stock

Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received a $5 per share dividend. What was her percentage return?

Are growth rate models such oversimplifications of reality that they're useless?

What is the value of a share of Wisconsin Gas $2.55 preferred stock if the investor's expected return is 8 percent?

Match the following:

The purpose of preemptive rights is to allow common stockholders to buy new shares at a lower price than currently offered on the open market.

Preferred stock is said to be a hybrid security having similarities to both common stock and bonds. Explain the similarities and differences between preferred stock, bonds, and common stock.

Match the following:

Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter. If the required rate of return is 9%, then what is the current value of the stock?

The valuation processes for stocks and bonds are about equally accurate. Evaluate this statement.

Monty's issued an 8% preferred stock with a $100 par value. The stock currently is yielding 6%. What is the current price?

When applying the Constant Growth Model, the required return must be greater than the rate of growth otherwise the results will be meaningless.

George Franks can buy shares of Ace Rocket Launcher for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any ARL? George feels that 18 percent is the appropriate required rate of return.

Atwater Inc. recently paid a dividend of $2.25 and the stock closed at $74.35 today. What is the dividend yield? ​

The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?

Justin Freez purchased a put option on General Auto's common stock at $2.90. The put has a striking price of $40 and General Auto's common stock is priced at $42.00. What is the most that Justin can lose on the put option purchase?

Match the following:

Match the following:

Atwater Inc. recently paid a dividend of $2.25 and the stock closed at $74.35 today. What is the dividend yield?