Question 1

Ernst Electrical increases its annual dividend by 1.8 percent annually.The stock commands a market rate of return of 18 percent and sells for $19.07 a share.What is the expected amount of the next dividend?

Accepted Answer

$19.07 = D₁/ (0.18 - 0.018) D₁ = $3.09

Question 2

Blasco just paid an annual dividend of $1.63 a share.What is one share of this stock worth to you if the dividends increase by 3 percent annually and you require a rate of return of 14 percent?

Accepted Answer

P₀= [$1.63 × (1 + 0.03)] / (0.14 − 0.03) P₀ = $15.26

Question 3

In a stock market report,the open price represents the

Accepted Answer

The open price in a stock market report represents the first trade of the day.

Question 4

Winslow Brothers common stock sells for $36.60 a share and pays an annual dividend that increases by 1.8 percent annually.The market rate of return on this stock is 14.7 percent.What is the amount of the last dividend paid?

Accepted Answer

$36.60 = (D₀ × 1.018)/ (0.147 - 0.018) D₀ = $4.64

Question 5

Feltwater Furniture has 134,000 shares of stock outstanding.The firm expects to earn net income of $286,000 next year with annual increases of 4 percent per year thereafter.The firm pays out 70 percent of its net income in dividends.The required return is 16 percent.What is the share price?

Accepted Answer

Price per share = [(0.70 × $286,000)/ 134,000] / (0.16 − 0.04)= $12.45

Question 6

Tyler Industries stock traditionally provides a rate of return of 13.7 percent.The company just paid an annual dividend of $1.21 a share and recently announced it will commence increasing its dividends by 1.6 percent each year.For this stock to return its traditional rate,what should the market price of this stock be?

Accepted Answer

P₀ = [$1.21 × (1 + 0.016)] / (0.137 − 0.016) P₀ = $10.16

Question 7

The ELL common stock pays an annual dividend of $2.23 a share and is committed to maintaining a constant dividend.How much are you willing to pay for one share of this stock if your required return is 16 percent?

Accepted Answer

P₀ = $2.23 / 0.16 P₀ = $13.94

Question 8

Shares of ABBO stock are currently selling for $14.43 a share.The last annual dividend paid was $1.61 a share,and dividends increase at a constant rate.If the market rate of return is 14 percent,what is the dividend growth rate?

Accepted Answer

$14.43 = [$1.61 × (1 + g)] / (0.14 − g) g = 0.0256,or 2.56%

Question 9

Wilton's Market just announced its next annual dividend will be $1.62 a share with future dividends increasing by 2.2 percent annually.How much will one share of this stock be worth 6 years from now if the required return is 12.5 percent?

Accepted Answer

P₆ = ($1.62 × 1.022⁶)/ (0.125 − 0.022)= $17.92

Question 10

Last week,Railway Cabooses paid its annual dividend of $1.12 a share.The company has been reducing its dividends by 4 percent each year.What is one share of stock worth at a required return of 17 percent?

Accepted Answer

P₀ = {$1.12 × [1 + (−0.04)]} / [0.17 − (−0.04)] = $5.12

Question 11

New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.30 each year for the next 3 years.In Year 5,it will pay a final liquidating dividend of $17 a share.If the required return is 22 percent,what is the current per share value of this stock?

Accepted Answer

P₀ = $1.70 / 1.22 + $1.40 / 1.22² + $1.10 / 1.22³ + $17 / 1.22⁵ P₀ = $9.23

Question 12

Dille Inc.pays no dividend at the present time.In Years 2 and 3,the firm will pay annual dividends of $4 a share.After that,it will pay a constant $2 a share dividend indefinitely.What is this stock worth at a required return of 17 percent?

Accepted Answer

P₃ = $2 / 0.17 = $11.76 P₀ = $4 / 1.17² + ($4 + 11.76)/ 1.17³ = $12.77

Question 13

General Stores recently announced that it will pay annual dividends of $1.05,$.80,and $.50 over the next 3 years,respectively.The following year,the firm will close and pay a final dividend of $11.30 a share.What is one share of this stock worth today at a discount rate of 16.6 percent?

Accepted Answer

P₀ = $1.05 / 1.166 + $0.80 / 1.166² + $0.50 / 1.166³ + $11.30 / 1.166⁴ = $7.92

Question 14

JJ Companies will pay an annual dividend of $4.20 a share on its common stock next year.Last week,the company paid a dividend of $4.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of this stock be worth 8 years from now if the applicable discount rate is 14 percent?

Accepted Answer

g = ($4.20 − 4.00)/ $4.00 = 0.05 P₈ = ($4.20 × 1.05⁸)/ (0.14 − 0.05) P₈ = $68.95

Question 15

Midtown Enterprises paid its first annual dividend yesterday in the amount of $.26 a share.The company plans to double each annual dividend payment for the next 3 years.After that,it will pay a constant $2.40 per share dividend indefinitely.What is one share of this stock worth today if the market rate of return on similar securities is 14.5 percent?

Accepted Answer

P₃ = $2.40 / 0.145 = $16.55 P₀ = $.52 / 1.145 + $1.04 / 1.145² + ($2.08 + 16.55)/ 1.145³ P₀ = $13.66

Question 16

CS Markets has 84,500 shares of stock outstanding.The firm paid out $68,200 in dividends this year and expects their total dividends to increase by 3.5 percent per year.The required return is 12 percent.What is the share price?

Accepted Answer

Price per share = {[$68,200 × (1 + 0.035)] / 84,500} / (0.12 − 0.035)= $9.83

Question 17

The Olde Mill just paid an annual dividend of $.38 a share and plans on decreasing this amount by 1 percent annually.What is the expected dividend for Year 6?

Accepted Answer

D₆ = $.38(1 − 0.01 )⁶ D₆ = $.3578

Question 18

XanEx is a new firm that just paid an annual dividend of $1 a share.The firm plans to increase its dividend by 10 percent a year for the next 4 years and then decrease the growth rate to 2 percent annually.If the required rate of return is 18.25 percent,what is one share of this stock worth today?

Accepted Answer

P₄ = ($1 × 1.1⁴ × 1.02)/ (0.1825 − 0.02)= $9.19 P₀ = ($1 × 1.1)/ 1.1825 + ($1 × 1.1²)/ 1.1825² + ($1 × 1.1³)/ 1.1825³ + [($1 × 1.1⁴)+ $9.19] / 1.1825⁴ P₀ = $8.05

Question 19

Mario's is going to pay $1,$2.65,and $4 a share over the next 3 years,respectively.After that,the company plans to pay annual dividends of $1.65 per share indefinitely.If your required return is 14 percent,how much are you willing to pay for one share today?

Accepted Answer

P₃ = $1.65 / 0.14 = $11.79 P₀ = $1 / 1.14 + $2.65 / 1.14² + ($4 + 11.79)/ 1.14³ = $13.57

Question 20

The Extreme Reaches Corp.'s last annual dividend was $1.98 per share.The company is planning on paying $2,$2,$2.50,and $3 a share over the next 4 years,respectively.After that,the dividend will be a constant $2.50 per share per year.What is the current price of this stock if the rate of return is 13 percent?

Accepted Answer

P₄ = $2.50 / 0.13 = $19.23 P₀ = $2 / 1.13 + $2 / 1.13² + $2.50 / 1.13³ + ($3 + 19.23)/ 1.13⁴ P₀ = $18.70

Quiz 6: Stock Valuation