Question 1

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year three, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

Accepted Answer

The correct answer is A because the current value per share is $25.51. The dividend yield is 12% / $2.40 = 5%. The dividend growth rate is 10% for the next two years and 2% thereafter. The current value of the stock is $2.40 / (0.12 - 0.05) = $25.51.

Question 2

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent?

Accepted Answer

P₃ = ($1.10 × 1.05)/(0.16 - 0.05) = $10.50; P₀ = [$0.55/1.16] + [$0.80/1.16²] + [($1.10 + $10.50)/1.16³] = $8.50

Question 3

The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock?

Accepted Answer

The answer of The common stock of Tasty Treats is...

Question 4

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

Accepted Answer

Dividend yield = $2.40/$46.10 = 5.21 percent

Question 5

The required return on Mountain Meadow stock is 14 percent and the dividend growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the dividend yield?

Accepted Answer

The answer of The required return on Mountain Meadow stock...

Question 6

The Market Place recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 15 percent?

Accepted Answer

The stock value today is calculated by finding the present value of the expected dividends. The dividends are $0.50 in year 2, $1.00 in year 3, and $2.00 in year 4. From year 5 onwards, the dividend grows at 4% annually. The present value of these dividends, discounted at the required return of 15%, gives the stock value today as $12.99.

Question 7

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required rate of return is 12 percent?

Accepted Answer

The current value of the stock is calculated by finding the present value of the expected dividends. The dividends for the first four years are calculated using the growth rates, and the constant dividend is used thereafter. The present value of these dividends is then calculated using the required rate of return.

Question 8

For the past six years, the price of Slate Rock stock has been increasing at a rate of 8.6 percent a year. Currently, the stock is priced at $47 a share and has a required return of 14 percent. What is the dividend yield?

Accepted Answer

The answer of For the past six years, the price...

Question 9

Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid?

Accepted Answer

$28.40 = (D₀ × 1.015)/(0.14 - 0.015); D₀ = $3.50

Question 10

River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past ten years and expects to continue doing so. What will a share of this stock be worth six years from now if the required return is 16 percent?

Accepted Answer

The answer of River Rock, Inc. just paid an annual...

Question 11

Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 15 percent?

Accepted Answer

The stock value is calculated using the dividend discount model. The present value of the first two dividends is calculated, and then the present value of the perpetuity starting from year 3 is added.

Question 12

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?

Accepted Answer

P₀ = $1.90/(0.12 - 0.035) = $22.35; P₃ = [$1.90 × (1.035)³]/(0.12 - 0.035) = $24.78; Capital gain = $24.78 - $22.35 = $2.43

Question 13

Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?

Accepted Answer

First, we need to calculate the expected dividend for next year:

Expected Dividend = $0.90 x (1 - 0.05) = $0.855

Then, we can use the Gordon Growth Model to determine the stock price:

Stock Price = (Expected Dividend ÷ (Required Return - Dividend Growth Rate)

Stock Price = ($0.855 ÷ (0.15 - 0.05)

Stock Price = $0.855 ÷ 0.10

Stock Price = $8.55

However, we are looking for the price of one share, so we need to divide this result by the number of outstanding shares:

Share Price = $8.55 ÷ 2 = $4.28

Therefore, the best choice is B.

Question 14

The Toy Box pays an annual dividend of $2.40 per share and sells for $46.60 a share based on a market rate of return of 15 percent. What is the capital gains yield?

Accepted Answer

We can use the formula for total return to find the capital gains yield:

Total return = dividend yield + capital gains yield

Since we know the dividend yield is $2.40/$46.60 = 0.0515, we can solve for the capital gains yield:

0.15 = 0.0515 + capital gains yield
Capital gains yield = 0.15 - 0.0515 = 0.0985 or 9.85%

Therefore, the answer is D.

Question 15

The Border Crossing just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 14 percent?

Accepted Answer

The answer of The Border Crossing just paid an annual...

Question 16

A stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?

Accepted Answer

The answer of A stock has paid dividends of $1.80,...

Question 17

Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now. Starting in year six, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?

Accepted Answer

The answer of Business Services, Inc. is expected to pay...

Question 18

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 5 years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent?

Accepted Answer

The answer of General Importers announced today that its next...

Question 19

The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?

Accepted Answer

The correct answer is A because the present value of the dividends is $2.38. The present value of the dividend for next year is $1.20 / (1 + 0.17) = $1.0256. The present value of the dividend for the following two years is $1.00 / (1 + 0.17)^2 = $0.7082. The present value of the dividend for the following three years is $0.00 / (1 + 0.17)^3 = $0.0000. The total present value of the dividends is $1.0256 + $0.7082 + $0.0000 = $2.38.

Question 20

Klaus Toys just paid its annual dividend of $1.40. The required return is 16 percent and the dividend growth rate is 2 percent. What is the expected value of this stock five years from now?

Accepted Answer

The answer of Klaus Toys just paid its annual dividend...

Quiz 7: Equity Markets and Stock Valuation