Question 1

Acme Consolidated has a return on equity of 12%.If Acme distributes 60% of earnings as dividends,its expected growth rate will be

Accepted Answer

A

Question 2

The XYZ Company,whose ordinary shares are currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?

Accepted Answer

The formula to calculate the stock price using the dividend growth model is:

Price = Dividend / (Required rate of return - Dividend growth rate)

Rearranging the formula to find growth rate:

Dividend growth rate = Required rate of return - Dividend / Price

Substituting the values given in the question:

Dividend growth rate = 14% - $2 / $40 = 0.09 or 9%

Therefore, the growth rate in dividends that must be expected is 9%, which is option C.

Question 3

________ gives minority shareholders more power to elect board of directors.

Accepted Answer

Cumulative voting allows minority shareholders to pool their votes and concentrate them on a single candidate or a small number of candidates for the board of directors. This gives them more influence in the election compared to traditional majority voting, where each shareholder is limited to one vote per share. A dual share class gives certain shareholders more voting power, but it does not necessarily benefit minority shareholders. A proxy is a document that authorizes someone to vote on another person's behalf, but it does not inherently give minority shareholders more power.

Question 4

You are evaluating the purchase of Cellars,Inc.ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12% for the next three years.You plan to hold the shares for three years and then sell it.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Calculate the present value of the expected dividends.

Accepted Answer

The present value of the expected dividends is calculated by discounting each expected dividend back to the present value using the required rate of return. The dividends for the next three years are $2.016, $2.25792, and $2.529, respectively. Discounting these at 17.5% gives a present value of approximately $4.91.

Question 5

If a company has a return on equity of 25% and wants a growth rate of 10%,how much of ROE should be retained?

Accepted Answer

The retention rate is the percentage of earnings that are kept by the company to reinvest back into the business for growth opportunities.

The formula for calculating the retention rate is:

Retention rate = 1 - (dividend payout ratio)

In this case, we are given the company's desired growth rate of 10%. To achieve this growth rate, the company must reinvest a portion of its earnings back into the business.

The formula for calculating the sustainable growth rate is:

Sustainable growth rate = return on equity x retention rate

We are given that the company's return on equity is 25% and its desired growth rate is 10%. Using these values, we can solve for the retention rate:

10% = 25% x retention rate
Retention rate = 40%

Therefore, the company should retain 40% of its earnings to achieve a sustainable growth rate of 10%.

Question 6

A firm just paid $2.00 on its ordinary shares and expects to continue paying dividends,which are expected to grow 5% each year,from now to infinity.If the required rate of return for this share is 9%,then the value of the share is

Accepted Answer

The answer of A firm just paid $2.00 on its...

Question 7

Butler,Inc.'s return on equity is 17% and management retains 75% of earnings for investment purposes.Based on this information,what will be the firm's growth rate?

Accepted Answer

The firm's growth rate can be calculated using the formula for sustainable growth rate (SGR), which is: SGR = Return on Equity (ROE) * Retention Ratio. Given ROE is 17% and the retention ratio (the percentage of earnings retained or not paid out as dividends) is 75%, the calculation is: 0.17 * 0.75 = 0.1275 or 12.75%.

Question 8

CEOs naming friends to the board of directors and paying them more than the norm is an example of

Accepted Answer

The scenario described in the question is an example of the agency problem, where the CEO (agent) may not act in the best interest of the shareholders (principal) and may prioritize their own interests or the interests of their friends on the board. This can lead to conflicts of interest and potential harm to the company's overall performance.

Question 9

You are evaluating the purchase of Somners Resources' ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12%,indefinitely.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Assuming that your analysis is correct,what is the most that you would be willing to pay for the ordinary shares if you were to purchase it today? Round to the nearest $.01.

Accepted Answer

The correct answer is A because the most that you would be willing to pay for the ordinary shares if you were to purchase it today is $36.65. This is calculated by dividing the expected dividend by the difference between the required rate of return and the expected dividend growth rate. In this case, the expected dividend is $1.80, the required rate of return is 17.5%, and the expected dividend growth rate is 12%. Therefore, the most that you would be willing to pay for the ordinary shares is $36.65.

Question 10

A decrease in the ________ will cause an increase in ordinary shares value.

Accepted Answer

The answer of A decrease in the ________ will cause...

Question 11

Wild Acre Metals has ordinary shares that paid a dividend of $1.00 a share last year.You expect the share to grow at 5% per year.If the appropriate rate of return on this share is 12%,how much are you willing to pay for the share today?

Accepted Answer

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

PV = D / (r - g)

Where PV is the present value, D is the dividend, r is the appropriate rate of return, and g is the expected growth rate.

PV = 1 / (0.12 - 0.05) 
PV = 1 / 0.07 
PV = 14.29

Therefore, the maximum price that you should pay for the share is $14.29. Since the choices are all rounded to the nearest dollar, the best choice is B ($15.00).

Question 12

Fris B.Corporation share is currently selling for $42.86.It is expected to pay a dividend of $3.00 at the end of the year.Dividends are expected to grow at a constant rate of 3% indefinitely.Compute the required rate of return on FBC shares.

Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model): Required Rate of Return = (Dividend / Current Price) + Growth Rate = ($3.00 / $42.86) + 0.03 = 0.07 or 7%.

Question 13

Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble ordinary shares if its required return is 18%?

Accepted Answer

The answer of Marble Corporation's ROE is 17%.Their dividend payout...

Question 14

A share currently sells for $63 per share,and the required return on the share is 10%.Assuming a growth rate of 5%,calculate the share's last dividend paid.

Accepted Answer

The answer of A share currently sells for $63 per...

Question 15

The expected rate of return on a share of ordinary shares whose dividends are growing at a constant rate (g)is which of the following?

Accepted Answer

The expected rate of return on a share of ordinary shares whose dividends are growing at a constant rate is calculated using the dividend discount model as D1/Vc + g, where D1 represents the next year's expected dividend, Vc represents the stock's current price or value, and g represents the expected constant rate of dividend growth.

Question 16

You are evaluating the purchase of Charbridge,Inc.ordinary shares that currently pay no dividend and is not expected to do so for many years.Because of rapidly growing sales and profits,you believe the share will be worth $51.50 in 3 years.If your required rate of return is 16%,what is the share worth today?

Accepted Answer

The present value of the share can be calculated using the formula for the present value of a future sum: PV = FV / (1 + r)^n, where FV is the future value ($51.50), r is the required rate of return (16% or 0.16), and n is the number of years (3). Plugging in the values: PV = $51.50 / (1 + 0.16)^3 = $32.99.

Question 17

Ordinary shareholders are essentially

Accepted Answer

Ordinary shareholders are owners of the firm, meaning they have ownership of a portion of the company and have the right to vote on important decisions. They are not creditors or managers of the firm.

Question 18

Green Company's ordinary shares are currently selling at $24.00 per share.The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%.At this rate,what is the share's expected rate of return?

Accepted Answer

The answer of Green Company's ordinary shares are currently selling...

Question 19

Gilliland Motor Limited just paid a dividend of $1.65 on its ordinary shares.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this share is 11%,compute the current value of per share of GML's shares.

Accepted Answer

Using the Gordon Growth Model:
Current Value = Dividend / (Required Rate of Return - Dividend Growth Rate)
Current Value = $1.65 / (0.11 - 0.03)
Current Value = $21.24
Therefore, the current value of per share of GML's shares is $21.24. Therefore, the correct answer is B.

Question 20

An investor is contemplating the purchase of ordinary shares at the beginning of this year and to hold the shares for one year.The investor expects the year-end dividend to be $2.00 and expects a year-end price for the share of $40.If this investor's required rate of return is 10%,then the value of the share to this investor is

Accepted Answer

The value of a share to an investor is the present value of all expected future cash flows.

Using the dividend discount model:

Value of share = (Expected dividend / Required rate of return) + Expected price at year-end / (1 + Required rate of return)

= (2 / 0.10) + 40 / (1.10)

= 20 + 36.36

= $56.36

However, the investor is only holding the share for one year, so we need to calculate the present value of the one-year expected cash flows: