Question 1

Mortgage Instruments Inc.is expected to pay dividends of $1.03 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?
A) $20.
B) $21.
C) $34.
D) $52.

Accepted Answer

The answer of Mortgage Instruments Inc.is expected to pay dividends...

Question 2

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 $1.36 per year? The next dividend will be paid in exactly 1 year.The required rate of return is 12.5%.
A) $17.00
B) $9.52
C) $10.88
D) $12.24

Accepted Answer

The value of a stock that pays a constant dividend can be calculated using the dividend discount model for a perpetuity: $P = \frac{D}{r}$, where $P$ is the price of the stock, $D$ is the dividend per share, and $r$ is the required rate of return. Plugging in the given values: $P = \frac{1.36}{0.125} = 10.88$.

Question 3

The Bell Weather Co.is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year.The company just paid its annual dividend in the amount of $1.00 per share.What is the current value of one share if the required rate of return is 9.25%?
A) $35.63
B) $38.19
C) $41.05
D) $43.19
E) $45.81

Accepted Answer

To calculate the current value of one share, we need to use the dividend discount model:

PV = D1 / (r - g)

Where PV is the present value of one share, D1 is the dividend expected at the end of the first year, r is the required rate of return and g is the growth rate.

For the first four years, the dividend growth rate is expected to be 20%, so we can find the future dividends as follows:

D2 = D1 x (1 + g) = $1.00 x (1 + 0.2) = $1.20
D3 = D2 x (1 + g) = $1.20 x (1 + 0.2) = $1.44
D4 = D3 x (1 + g) = $1.44 x (1 + 0.2) = $1.73

After the fourth year, the dividend growth rate is expected to be 5%, so we can find the dividend for year 5 and use it as the constant growth rate from then onwards:

D5 = D4 x (1 + g) = $1.73 x (1 + 0.05) = $1.82

Now, we can calculate the present value of all future dividends using the dividend discount formula:

PV = $1.00/(0.0925 - 0.20) + $1.20/(1 + 0.0925)^2/(0.0925 - 0.20) + $1.44/(1 + 0.0925)^3/(0.0925 - 0.20) + $1.73/(1 + 0.0925)^4/(0.0925 - 0.20) + $1.82/(1 + 0.0925)^5/(0.0925 - 0.05)

PV = $7.78

Therefore, the current value of one share is $7.78. Answer C, $41.05, is the closest option to this value.

Question 4

The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 5% a year for the next two years.After that,it will maintain a constant dividend of $1 a share.Two weeks ago,the company paid a dividend of $1.40 per share.What is this stock worth if you require a 9% rate of return?
A) $10.86
B) $11.11
C) $11.64
D) $12.98
E) $14.23

Accepted Answer

To find the current stock price, we need to use the dividend discount model formula:

Stock price = (next year's dividend / (required rate of return - dividend growth rate))

First, we need to calculate the dividend per share in year 1 after the dividend cut. It will be: 
$1.40 x (1 - 0.05) = $1.33

Then, we can calculate the stock price: 
Stock price = ($1.33 / (0.09 - 0.05)) + ($1 / (1.09)^2)
Stock price = $11.64

Question 5

Zeta Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?
A) $968.
B) $731.
C) $1,000.
D) $1,125.

Accepted Answer

The price of a zero-coupon bond is calculated by discounting its face value back to the present using the formula $ P = \frac{F}{(1 + r)^n} $, where $ P $ is the price, $ F $ is the face value, $ r $ is the annual discount rate, and $ n $ is the number of years until maturity. Plugging in the given values ($ F = 1000 $, $ r = 0.04 $, $ n = 8 $), we get $ P = \frac{1000}{(1 + 0.04)^8} \approx 731 $.

Question 6

A stock you are interested in paid a dividend of $1 last month.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.
A) $15.38
B) $20.50
C) $21.05
D) $22.27
E) $26.14

Accepted Answer

First, we need to calculate the expected dividends for the next 2 years using the 25% growth rate:
Year 1 dividend = $1 x 1.25 = $1.25
Year 2 dividend = $1.25 x 1.25 = $1.56

After 2 years, the expected constant growth rate of 5% applies, so we can use the Gordon Growth Model formula to calculate the expected price of the stock:
P = D / (r - g)
Where:
P = Expected price of the stock
D = Dividend in the next year
r = Discount rate
g = Expected constant growth rate of dividends

Plugging in the values:
P = $1.56 (1 + 0.05) / (0.12 - 0.05)
P = $21.05

Therefore, the best choice is C) $21.05 as it is the expected price of the stock.

Question 7

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 one year from now and $11 two years from now? The stock will be sold in 2 years for an estimated price of $120.The appropriate discount rate is 9%.
A) $114.
B) $119.
C) $124.
D) $129.
E) $138.

Accepted Answer

The answer of Which of the following values is closest...

Question 8

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this stock is 9%.What is the amount of the last dividend paid by Weisbro and Sons?
A) $.77
B) $.80
C) $.84
D) $.87
E) $.88

Accepted Answer

The answer of Weisbro and Sons common stock sells for...

Question 9

&P Inc.common stock sells for $39.86 a share at a market rate of return of 9.5%.The company just paid its annual dividend of $1.20.What is the rate of growth of its dividend?
A) 5.2%
B) 5.5%
C) 5.9%
D) 6.0%
E) 6.3%

Accepted Answer

The answer of &P Inc.common stock sells for $39.86 a...

Question 10

The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 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 ___.
A) $9.38
B) $17.05
C) $41.67
D) $59.80
E) $62.38

Accepted Answer

The answer of The Felix Corp.projects to pay a dividend...

Question 11

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.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 11%.
A) $39.38
B) $37.50
C) $21.48
D) $20.45

Accepted Answer

The answer of Which of the following amounts is closest...

Question 12

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.The estimated growth for No-Zip is:
A) 2.4%
B) 5.6%
C) 7.2%
D) 16.8%

Accepted Answer

To find the estimated growth, we can use the formula:

Growth rate = (Net earnings - Dividends) / Equity

Plugging in the given values:

Growth rate = (127,000 - 38,100) / 1,587,500 = 0.0636 or 6.36%

Therefore, the estimated growth rate for No-Zip is 6.36%, and the closest option is B) 5.6%.

Question 13

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?
A) Both bonds would decrease in value by 4.61%.
B) The Earls bond will increase in value by $88.25.
C) The Jackson bond will increase in value by 4.61%.
D) The Earls bond will decrease in value by 7.56%.
E) The Earls bond will decrease in value by $50.68.

Accepted Answer

When the market yield increases to 7%, the Earls bond will decrease in value by 7.56%. This can be calculated as follows: 
- Calculate the present value of the bond's cash flows at the new yield of 7%:
  PV = (80 / 1.07) + (80 / 1.07^2) + ... + (80 + 1000) / 1.07^12
  PV = $993.94
- Calculate the bond's new price:
  Price = PV / (1 + Yield)^n
  Price = $993.94 / 1.07^12
  Price = $657.85
- Calculate the percentage change in the bond's price:
  % Change = (New Price - Old Price) / Old Price
  % Change = ($657.85 - $712.53) / $712.53
  % Change = -7.56%
 
The other answer choices are incorrect because: 
- A) Both bonds would not decrease in value by the same amount since they have different maturities. 
- B) The Earls bond will not increase in value when the market yield increases. 
- C) The Jackson bond will not increase in value when the market yield increases. 
- E) The amount of the decrease in the Earls bond's value will be greater than $50.68.

Question 14

The dividend growth rate is equal to the product of what two ratios?
A) ROA, current ratio.
B) ROE, retention ratio.
C) PM, ROA.
D) ROA, ROE.

Accepted Answer

The dividend growth rate is equal to the product of the return on equity (ROE) and the retention ratio, which represents the portion of earnings that is reinvested in the company rather than paid out as dividends. Option A is incorrect because the current ratio is a measure of a company's liquidity, not profitability or dividend growth. Option C is incorrect because the profit margin (PM) is a measure of profitability, but it does not directly relate to dividend growth. Option D is incorrect because while both ROA and ROE are measures of profitability, they do not consider the retention ratio, which is necessary for calculating dividend growth.

Question 15

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.This dividend increases at an average rate of 3.5% per year.The stock is currently selling for $62.10 a share.What is the market rate of return?
A) 2.5%
B) 3.5%
C) 5.5%
D) 6.0%
E) 9.5%

Accepted Answer

The answer of Martha's Vineyard recently paid a $3.60 annual...

Question 16

If a company is currently paying $.40 in dividends and they are expected to grow at 7% for the next 6 years and then grow at 4% thereafter the dividend expected in year 8 is:
A) $4.33.
B) $0.65.
C) $4.39.
D) $0.69.
E) $0.67.

Accepted Answer

The answer of If a company is currently paying $.40...

Question 17

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.These dividends are expected to grow at a rate of 5% in the foreseeable future.The required rate of return is 11%.
A) $20.45
B) $21.48
C) $37.50
D) $39.38
E) $47.70

Accepted Answer

The answer of Which of the following amounts is closest...

Question 18

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?
A) 11.11% decrease
B) 12.38% decrease
C) 12.38% increase
D) 14.13% decrease
E) 14.13% increase

Accepted Answer

To calculate the price change of the bond, we need to first calculate the current price of the bond and the new price of the bond after the change in market yield. We can use the following formula to calculate the price of the bond:

Price of Bond = (Coupon Payment / Yield) x (1 - 1 / (1 + Yield)^(Number of Years)) + (Face Value / (1 + Yield)^(Number of Years))

Using the current market yield of 4.5%, we can calculate the current price of the bond:

Coupon Payment = $1,000 x 5% = $50
Yield = 4.5%
Number of Years = 12

Price of Bond = ($50 / 4.5%) x (1 - 1 / (1 + 4.5%)^12) + ($1,000 / (1 + 4.5%)^12) = $1,170.63

Using the new market yield of 6%, we can calculate the new price of the bond:

Coupon Payment = $1,000 x 5% = $50
Yield = 6%
Number of Years = 12

Price of Bond = ($50 / 6%) x (1 - 1 / (1 + 6%)^12) + ($1,000 / (1 + 6%)^12) = $1,034.63

Finally, we can calculate the percentage change in price using the following formula:

Percentage Change = ((New Price - Old Price) / Old Price) x 100%

Percentage Change = (($1,034.63 - $1,170.63) / $1,170.63) x 100% = -11.53%

Therefore, the percentage change in the price of the bond is a decrease of 11.53%, which is closest to option B (12.38% decrease).

Question 19

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.If No-Zip has 100,000 shares outstanding with a current market price of $11 5/8 per share,what is the required rate of return?
A) 9%
B) 6%
C) 4.2%
D) 14%

Accepted Answer

The answer of The No-zip Snap Company had net earnings...

Question 20

The value of common stock today depends on:
A) the expected future holding period and the discount rate.
B) the expected future dividends and the capital gains.
C) the expected future dividends, capital gains and the discount rate.
D) the expected future holding period and capital gains.

Accepted Answer

The value of common stock is determined by the expected future dividends and capital gains (both of which are measures of the returns that investors can expect from holding the stock) as well as the discount rate used to determine the present value of those future returns. Therefore, both options A and B are incomplete as they do not include all of these factors. However, option C includes all three factors - expected future dividends, capital gains, and discount rate - and is therefore the best choice. Option D is also incomplete as it excludes the discount rate.

Quiz 6: How to Value Bonds and Stocks

Mortgage Instruments Inc.is expected to pay dividends of $1.03 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?

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 $1.36 per year? The next dividend will be paid in exactly 1 year.The required rate of return is 12.5%.

Zeta Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

A stock you are interested in paid a dividend of $1 last month.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.

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 one year from now and $11 two years from now? The stock will be sold in 2 years for an estimated price of $120.The appropriate discount rate is 9%.

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this stock is 9%.What is the amount of the last dividend paid by Weisbro and Sons?

&P Inc.common stock sells for $39.86 a share at a market rate of return of 9.5%.The company just paid its annual dividend of $1.20.What is the rate of growth of its dividend?

The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 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 ___.

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.The estimated growth for No-Zip is:

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?

The dividend growth rate is equal to the product of what two ratios?

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.This dividend increases at an average rate of 3.5% per year.The stock is currently selling for $62.10 a share.What is the market rate of return?

If a company is currently paying $.40 in dividends and they are expected to grow at 7% for the next 6 years and then grow at 4% thereafter the dividend expected in year 8 is:

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.These dividends are expected to grow at a rate of 5% in the foreseeable future.The required rate of return is 11%.

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.If No-Zip has 100,000 shares outstanding with a current market price of $11 5/8 per share,what is the required rate of return?

The value of common stock today depends on: