Question 1

Blasco just paid an annual dividend of $1.24 a share.What is one share of this stock worth to you if the dividends increase by 2 percent annually and you require a rate of return of 12 percent?

Accepted Answer

P₀ = [$1.24 × (1 + .02)]/(.12 - .02)P₀ = $12.65

Question 2

Shares of ABBO stock are currently selling for $29.06 a share.The last annual dividend paid was $1.50 a share and dividends increase at a constant rate.If the market rate of return is 10 percent,what is the dividend growth rate?

Accepted Answer

$29.06 = [$1.50 × (1 + g)]/(.10 - g)g = .0460,or 4.60%

Question 3

XanEx is a new firm that just paid an annual dividend of $1 a share.The firm plans to increase its dividend by 20 percent a year for the next four years and then decrease the growth rate to 5 percent annually.If the required rate of return is 10.25 percent,what is one share of this stock worth today?

Accepted Answer

P₄ = ($1 × 1.2⁴ × 1.05)/(.1025 - .05)= $41.47P₀ = ($1 × 1.2)/1.1025 + ($1 × 1.2²)/1.1025²] + ($1 × 1.2³)/1.1025³ + [($1 × 1.2⁴)+ $41.47]/1.1025⁴P₀ = $33.04

Question 4

Sharpe General Stores is declining so it has announced that it will pay annual dividends of $.80,$.50,and $.50 over the next three years,respectively.The following year,the firm will close and pay a final dividend of $13.80 a share.If you have a required return of 14.5 percent,what is one share of this stock worth to you today?

Accepted Answer

P₀ = $.80/1.145 + $.50/1.145² + $.50/1.145³ + $13.80/1.145⁴ = $9.44

Question 5

Grenville common stock had a 12.25 percent rate of return last year.The fixed annual dividend is $.65 a share,which equates to a dividend yield of 1.6 percent.What was the rate of price appreciation on the stock?

Accepted Answer

g = 12.25% - 1.6% = 10.65%

Question 6

Dirt Bikes just announced that its next annual dividend will be $1.42 a share and that all future dividends are expected to increase by 2.5 percent annually.What is the market rate of return if this stock is currently selling for $14.11 a share?

Accepted Answer

R = ($1.42/$14.11)+ .025R = .1256,or 12.56%

Question 7

Tyler Industries stock traditionally provides a rate of return of 14.2 percent.The company just paid an annual dividend of $1.65 a share and recently announced it will commence increasing its dividends by 3.5 percent each year.For this stock to return its traditional rate,what should the market price of this stock be?

Accepted Answer

P₀ = [$1.65 × (1 + .035)]/(.142 - .035)P₀ = $15.96

Question 8

Shares of a common stock offer an expected total return of 12 percent.What is the dividend yield if the dividend increases by 3 percent annually?

Accepted Answer

Dividend yield = 12% - 3% = 9%

Question 9

Mario's is going to pay $1,$2.50,and $5 a share over the next three years,respectively.After that,the company plans to pay annual dividends of $1.25 per share indefinitely.If your required return is 13 percent,how much are you willing to pay for one share today?

Accepted Answer

P₃ = $1.25/.13 = $9.62P₀ = $1/1.13 + $2.50/1.13² + ($5 + 9.62)/1.13³ = $12.97

Question 10

Wilton's Market just announced its next annual dividend will be $1.50 a share with future dividends increasing by 1.8 percent annually.How much will one share of this stock be worth five years from now if the required return is 15.5 percent?

Accepted Answer

P₅ = ($1.50 × 1.018⁵)/(.155 - .018)= $11.97

Question 11

Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount by 2 percent annually.What is the expected dividend for Year 6?

Accepted Answer

D₆ = $.24 (1.02)⁶ = $.27

Question 12

The Vinyard recently paid a $2.38 annual dividend on its common stock.This dividend increases at 1.75 percent per year and currently sells for $40.15 a share.What is the rate of return?

Accepted Answer

R = [($2.38 × 1.0175)/$40.15] + .0175R = .0778,or 7.78%

Question 13

JJ Companies will pay an annual dividend of $2.10 a share on its common stock next year.Last week,the company paid a dividend of $2 a share.The company adheres to a constant rate of growth dividend policy.What will one share of this stock be worth ten years from now if the applicable discount rate is 9 percent?

Accepted Answer

g = ($2.10 - 2.00)/$2.00 = .05P₁₀ = ($2.10 × 1.05¹⁰)/(.09 - .05)P₁₀ = $85.52

Question 14

Ernst Electrical increases its annual dividend by 2.2 percent annually.The stock commands a market rate of return of 15 percent and sells for $26.60 a share.What is the expected amount of the next dividend?

Accepted Answer

$26.60 = D₁/(.15 - .022)D₁ = $3.40

Question 15

Wislow Brothers common stock sells for $28.20 a share and pays an annual dividend that increases by 1.5 percent annually.The market rate of return on this stock is 11.3 percent.What is the amount of the last dividend paid?

Accepted Answer

$28.20 = (D₀ × 1.015)/(.113 - .015)D₀ = $2.72

Question 16

Dille Inc.pays no dividend at the present time.In Years 2 and 3,the firm will pay annual dividends of $3 a share.After that,it will pay a constant $1 a share dividend indefinitely.What is this stock worth at a required return of 15 percent?

Accepted Answer

P₃ = $1/.15 = $6.67P₀ = $3/1.15² + ($3 + 6.67)/1.15³ = $8.62

Question 17

New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.50 each year for the next three years.In Year 5,it will pay a final liquidating dividend of $22 a share.If the required return is 16 percent,what is the current per share value of this stock?

Accepted Answer

P₀ = $1.50/1.16 + $1/1.16² + $.50/1.16³ + $22/1.16⁵P₀ = $12.83

Question 18

Midtown Enterprises paid its first annual dividend yesterday in the amount of $.28 a share.The company plans to double each annual dividend payment for the next three years.After that,it will pay a constant $1.50 per share dividend indefinitely.What is one share of this stock worth today if the market rate of return on similar securities is 11.5 percent?

Accepted Answer

P₃ = $1.50/.115 = $13.04P₀ = $.56/1.115 + $1.12/1.115² + ($2.24 + 13.04)/1.115³P₀ = $12.43

Question 19

The Extreme Reaches Corp.last paid a $1.50 per share annual dividend.The company is planning on paying $3,$5,$7.50,and $10 a share over the next four 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 14 percent?

Accepted Answer

P₄ = $2.50/.14 = $17.86P₀ = $3/1.14 + $5/1.14² + $7.50/1.14³ + ($10 + 17.86)/1.14⁴P₀ = $28.03

Question 20

The ELL common stock pays an annual dividend of $1.90 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 11 percent?

Accepted Answer

P₀ = $1.90/.11P₀ = $17.27

Quiz 6: Stock Valuation