Question 1

A firm has two classes of common stock outstanding:
 Class A,which carries voting rights of 10 votes per share but receives no dividends (ever),and Class B,which carries voting rights of 1 vote per share and pays dividends whenever they are declared by the board.Which would you be willing to pay more for and why?

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Question 2

Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond,and explain why.

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Question 3

The Lory Company had net earnings of $127,000 this past year.Dividends of $38,100 were paid on the company's equity of $1,587,500.If Lory has 100,000 shares outstanding with a current market price of $11.625 per share,and the growth rate was 5.6% what is the required rate of return?

Accepted Answer

We can use the dividend discount model to solve for the required rate of return.
Dividend per share = Dividends / Number of shares = $38,100 / 100,000 = $0.381
Using the formula: 
Current market price = Dividend per share / (Required rate of return - Growth rate)
$11.625 = $0.381 / (r - 5.6%)
Solving for r, we get:
r = 9.0% rounded to one decimal place.
Therefore, the required rate of return is 9%, which is option C.

Question 4

Which of the following amounts is closest to what should be paid for Ryan common stock? Ryan has just paid a dividend of $1.75.These dividends are expected to grow at a rate of 5% in the foreseeable future.The risk of this company suggests that future cash flows should be discounted at a rate of 12%.

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Question 5

Doctors-On-Call,a newly formed medical group,just paid a dividend of $.50.The company's dividends are expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter.What is the value of the stock if the appropriate discount rate is 12%?

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Question 6

What are the primary differences between NASDAQ and the NYSE?

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Question 7

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $2.50 per year? The next dividend will be paid in exactly 1 year.The required rate of return is 11%.

Accepted Answer

The price of a stock with no growth opportunities can be calculated using the dividend discount model:
Stock Price = Dividend / Required Rate of Return
Substituting the given values, we get:
Stock Price = $2.50 / 0.11 = $22.73
Therefore, an investor should not pay more than $22.73 for the common stock of this firm, making choice C the best answer.

Question 8

Ramchander Investment Group is expected to pay dividends of $1.40 next year.The company just paid dividends of $1.30.This growth rate is expected to continue.How much should be paid for Ramchander Investment Group stock just after the dividend if the appropriate discount rate is 10%?

Accepted Answer

Using the dividend discount model, we can calculate the value of a stock based on the present value of its future dividends. 
The formula for a constant dividend growth rate is: 
PV = D / (r - g)
PV = Present value of stock
D = Expected dividend next year
r = Required rate of return
g = Expected growth rate of dividends

Plugging in the given values: 
PV = 1.40 / (0.10 - 0.03)
PV = 1.40 / 0.07
PV = $20

Therefore, the stock should be worth $20 just after the dividend is paid.

Question 9

A stock you are interested in paid a dividend of $1 last year.The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate.The discount rate is 12%.Calculate the expected price of the stock.

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Question 10

The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following three years before growing at 8% indefinitely thereafter.The equity has a required return of 10% in the market.The price of the stock should be ___.

Accepted Answer

The price of the stock is calculated using the dividend discount model (DDM) with varying growth rates. First, calculate the present value of dividends for the first four years, then calculate the terminal value at the end of year 4 using the Gordon Growth Model for the indefinite growth period, and finally discount all cash flows to the present value using the required return of 10%.

Question 11

If a company paid a dividend of $0.50 last year and it is expected to grow at 7% for the next 8 years and then grow at 5% thereafter,the dividend expected in year 8 is __.

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Question 12

Briefly explain the differences between preferred and common stock.

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Question 13

What are the components of the required rate of return on a share of stock?
 Briefly explain each component.

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Question 14

A stock you are interested in paid a dividend of $1 last year.The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate.The discount rate is 12%.Calculate the expected price of the stock.

Accepted Answer

First, we need to calculate the dividends for the next 2 years based on the 25% growth rate:

Dividend in Year 1 = $1 x (1 + 25%) = $1.25
Dividend in Year 2 = $1.25 x (1 + 25%) = $1.56

Then, we need to calculate the expected price of the stock after 2 years using the constant growth rate formula:

P2 = D3 / (r - g) = $1.56 x (1 + 5%) / (12% - 5%) = $27.04

Finally, we need to discount the expected price back to the present using the discount rate:

P0 = P2 / (1 + r)^2 = $27.04 / (1 + 12%)^2 = $21.04

Therefore, the expected price of the stock is $21.04, which is answer choice C.

Question 15

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120.The appropriate discount rate is 8%.

Accepted Answer

We can use the formula for the present value of a stock with constant growth, which is:

PV = (Dividend / (r - g)) + (P / (1 + r)^n)

where PV is the present value of the stock, Dividend is the expected dividend in the first year, r is the discount rate, g is the expected growth rate of dividends, P is the expected sale price of the stock, and n is the number of years until the sale.

Plugging in the given values, we get:

PV = (10 / (0.08 - 0.11)) + (120 / (1 + 0.08)^2) 
PV = $121.57

Therefore, the closest value to the amount that should be paid for the stock is $121.57.

Question 16

You want to earn a 12% rate of return.Panco,Inc.preferred stock pays a $6.75 annual dividend.What is the maximum price you are willing to pay for one share of this stock?

Accepted Answer

To find the maximum price you are willing to pay for the stock, use the formula for the price of a preferred stock: Price = Dividend / Required Rate of Return. Here, Price = $6.75 / 0.12 = $56.25.

Question 17

List the four types of New York Stock Exchange members and give a brief definition of what each member does.

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Question 18

Are most stocks constant growth or differential growth?
 Why?

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Question 19

A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms.How is this possible?
 Does this violate our basic principle of stock valuation?
 Explain.

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Quiz 6: Stock Valuation