Chap009.doc

Chapter 09 - Stock Valuation

Chapter 09 How to Value Stocks Multiple Choice Questions

1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess o the discount rate less the dividend gro!th rate is called the """"" model. #. $ero gro!th %. dividend gro!th C. capital pricing &. earnings capitali$ation '. dierential gro!th

(. )ext year*s annual dividend divided by the current stock price is called the+ #. yield to maturity. %. total yield. C. dividend yield. &. capital gains yield. '. earnings yield.

,. The rate at !hich a stock*s price is expected to appreciate or depreciate d epreciate is called the """"" yield. #. current %. total C. dividend &. capital gains '. earnings

/. # orm o euity !hich receives no preerential treatment in either the payment o dividends or in bankruptcy distributions is called """"" stock. #. dual class %. cumulative C. deerred &. preerred '. common

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. 2ayments made by a corporation to its shareholders3 in the orm o either cash3 stock or payments in kind3 are called+ #. retained earnings. %. net income. C. dividends. &. redistributions. '. inused euity.

4. The constant dividend gro!th model is+ #. generally used in practice because becau se most stocks have a constant gro!th rate. %. generally used in practice because b ecause the historical gro!th rate o most stocks is constant. C. generally not used in practice because most stocks gro! at a non constant rate. &. generally not used in practice because the constant gro!th rate is usually higher than the reuired rate o return. '. based on the assumption &o! ,0 represents a good estimate o the market index.

5. The constant dividend gro!th model+ 6. assumes that dividends increase at a constant rate orever. 66. can be used to compute c ompute a stock price at any point o time. 666. states that the market price o a stock is only aected by the amount o the dividend. 6V. 6V. considers capital gains but ignores the dividend yield. #. 6 only %. 66 only C. 666 and 6V only &. 6 and 66 only '. 63 663 and 666 only

7. The underlying assumption o the dividend gro!th model is that a stock is !orth+ #. the same amount to every ever y investor regardless o their desired rate o return. %. the present value o the uture income !hich the stock generates. C. an amount computed as the next annual dividend divided by the market rate o return. &. the same amount as any other stock that pays the same current dividend and has the same reuired rate o return. '. an amount computed as the next annual dividend divided by the reuired rate o return.

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4. The constant dividend gro!th model is+ #. generally used in practice because becau se most stocks have a constant gro!th rate. %. generally used in practice because b ecause the historical gro!th rate o most stocks is constant. C. generally not used in practice because most stocks gro! at a non constant rate. &. generally not used in practice because the constant gro!th rate is usually higher than the reuired rate o return. '. based on the assumption &o! ,0 represents a good estimate o the market index.

5. The constant dividend gro!th model+ 6. assumes that dividends increase at a constant rate orever. 66. can be used to compute c ompute a stock price at any point o time. 666. states that the market price o a stock is only aected by the amount o the dividend. 6V. 6V. considers capital gains but ignores the dividend yield. #. 6 only %. 66 only C. 666 and 6V only &. 6 and 66 only '. 63 663 and 666 only

7. The underlying assumption o the dividend gro!th model is that a stock is !orth+ #. the same amount to every ever y investor regardless o their desired rate o return. %. the present value o the uture income !hich the stock generates. C. an amount computed as the next annual dividend divided by the market rate o return. &. the same amount as any other stock that pays the same current dividend and has the same reuired rate o return. '. an amount computed as the next annual dividend divided by the reuired rate o return.

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9. #ssume that you are using the dividend gro!th model to value stocks. 6 you expect the market rate o return to increase across the board on all euity securities3 then you should also expect the+ #. market values o all stocks to increase3 all else constant. %. market values o all stocks to remain constant con stant as the dividend gro!th !ill oset the increase in the market rate. C. market values o all stocks to decrease3 all else constant. &. stocks that do not pay dividends to decrease in price !hile the dividend-paying stocks maintain a constant price. '. dividend gro!th rates to increase to oset this change.

10. 8atcher*s 6nc. is a relatively ne! irm that is still in a period o rapid development. The company plans on retaining all o o  its earnings or the next six years. Seven years rom no!3 the company proects paying an annual dividend o :.( a share and then increasing that amount by ,; annually thereater. To To value this stock as o today3 you !ould most likely determine the value o the stock """"" years rom today beore determining today*s value. #. / %.  C. 4 &. 5 '. 7

11. The
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1(. &ierential gro!th reers to a irm that increases its dividend by+ #. three or more percent per year. %. a rate !hich is most likely not sustainable over an extended period o time. C. a constant rate o t!o or more percent per year. &. :.10 or more per year. '. an amount in excess exc ess o :.10 a year.

1,. The total rate o return earned on a stock is comprised o !hich t!o o the ollo!ing= 6. current yield 66. yield to maturity 666. dividend yield 6V. capital gains yield #. 6 and 66 only %. 6 and 6V only C. 66 and 666 only &. 66 and 6V only '. 666 and 6V only

1/. >red >lintlock !ants to earn a total o 10; on his investments. ?e recently purchased shares o #%C stock at a price o :(0 a share. The stock pays a :1 a year dividend. The price o #%C stock needs to """"" i >red is to achieve his 10; rate o return. #. remain constant %. decrease by ; C. increase by ; &. increase by 10; '. increase by 1;

1. The Scott Co. has a general dividend policy !hereby it pays a constant annual dividend o :1 per share o common stock. The irm has 13000 shares o stock outstanding. The company+ #. must al!ays sho! a current liability o :13000 or dividends payable. %. is obligated to continue paying :1 per share per year. C. !ill be declared in deault and can ace bankruptcy i it does not pay :1 per year to each shareholder on a timely basis. &. has a liability !hich must be paid at a later date should the company miss paying an annual dividend payment. '. must still declare each dividend beore it becomes an actual company liability.

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14. The value o common stock today depends on+ #. the expected uture holding period and the discount rate. %. the expected uture dividends and the capital gains. C. the expected uture dividends3 capital gains and the discount rate. &. the expected uture holding period and capital gains. '. )one o the above.

15. The closing price o a stock is uoted at ((.753 !ith a 2@' o (4 and a net change o 1./(. %ased on this inormation3 !hich one o the ollo!ing statements is correct= #. The closing price on the previous day !as :1./( higher than today*s closing price. %. # dealer !ill buy the stock at :((.75 and sell it at :(4 a share. C. The stock increased in value bet!een yesterday*s close and today*s close by :.01/(. &. The earnings per share are eual to 1@(4th o :((.75. '. The earnings per share have ha ve increased by :1./( this year.

17. # stock listing contains the ollo!ing inormation+ 2@' 15.3 closing price ,,.103 dividend .703 AT&; chg ,./3 and net chg - .0. Bhich o the ollo!ing statements are correct given this inormation= 6. The stock price has increased by ,./; during the current year. 66. The closing price on the previous trading day !as :,(.40. 666. The earnings per share are approximately :1.79. 6V. The current yield is 15.;. #. 6 and 66 only %. 6 and 666 only C. 66 and 666 only &. 666 and 6V only '. 63 6663 and 6V only

19. The discount rate in euity valuation is composed entirely o+ #. the dividends paid and the capital gains yield. %. the dividend yield and the gro!th rate. C. the dividends paid and the gro!th rate. &. the capital gains earned and the gro!th rate. '. the capital gains earned and the dividends paid.

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(0. The net present value o a gro!th opportunity3 )2VD3 can be deined as+ #. the initial investment necessary or a ne! proect. %. the net present value per share o an investment in a ne! proect. C. a continual reinvestment o earnings !hen r E g. &. a single period investment !hen r F g. '. )one o the above.

(1. #ngelina*s made t!o announcements concerning its common stock today. >irst3 the company announced that its next annual dividend has been set at :(.14 a share. Secondly3 the company announced that all uture dividends !ill increase by /; annually. Bhat is the maximum amount you should pay to purchase a share o #ngelina*s stock i your goal is to earn a 10; rate o return= #. :(1.40 %. :((./4 C. :(5.// &. :,/.4( '. :,4.00

((. ?o! much are you !illing to pay or one share o stock i the company ust paid an :.70 annual dividend3 the dividends increase by /; annually and you reuire an 7; rate o return= #. :19.(, %. :(0.00 C. :(0./0 &. :(0.70 '. :(1.4,

(,. 8ee ?ong 6mports paid a :1.00 per share annual dividend last !eek. &ividends are expected to increase by ; annually. Bhat is one share o this stock !orth to you today i the appropriate discount rate is 1/;= #. :5.1/ %. :5.0 C. :11.11 &. :11.45 '. :1(.(

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(/. Gaestic ?omes* stock traditionally provides an 7; rate o return. The company ust paid a :( a year dividend !hich is expected to increase by ; per year. 6 you are planning on buying 13000 shares o this stock next year3 ho! much should you expect to pay per share i the market rate o return or this type o security is 9; at the time o your purchase= #. :/7.40 %. :(.0 C. :.1, &. :5.79 '. :50.00

(. 8eslie*s Hniue Clothing Stores oers a common stock that pays an annual dividend o :(.00 a share. The company has promised to maintain a constant dividend. ?o! much are you !illing to pay or one share o this stock i you !ant to earn a 1(; return on your euity investments= #. :10.00 %. :1,.,, C. :14.45 &. :17.77 '. :(0.00

(4. Gartin*s Aachts has paid annual dividends o :1./03 :1.53 and :(.00 a share over the past three years3 respectively. The company no! predicts that it !ill maintain a constant dividend since its business has leveled o and sales are expected to remain relatively constant. iven the lack o uture gro!th3 you !ill only buy this stock i you can earn at least a 1; rate o return. Bhat is the maximum amount you are !illing to pay to buy one share today= #. :10.00 %. :1,.,, C. :14.45 &. :17.77 '. :(0.00

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(5. The common stock o 'ddie*s 'ngines3 6nc. sells or :(.51 a share. The stock is expected to pay :1.70 per share next month !hen the annual dividend is distributed. 'ddie*s has established a pattern o increasing its dividends by /; annually and expects to continue doing so. Bhat is the market rate o return on this stock= #. 5; %. 9; C. 11; &. 1,; '. 1;

(7. The current yield on #lpha*s common stock is /.7;. The company ust paid a :(.10 dividend. The rumor is that the dividend !ill be :(.(0 next year. The dividend gro!th rate is expected to remain constant at the current level. Bhat is the reuired rate o return on #lpha*s stock= #. 10.0/; %. 14.05; C. (1.77; &. /,.5; '. /.9/;

(9. Gartha*s Vineyard recently paid a :,.40 annual dividend on its common stock. This dividend increases at an average rate o ,.; per year. The stock is currently selling or :4(.10 a share. Bhat is the market rate o return= #. (.; %. ,.; C. .; &. 4.0; '. 9.;

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,0. %et*< %ilt %ikes ust announced that its annual dividend or this coming year !ill be :(./( a share and that all uture dividends are expected to increase by (.; annually. Bhat is the market rate o return i this stock is currently selling or :(( a share= #. 9.; %. 11.0; C. 1(.; &. 1,.; '. 1.0;

,1. Shares o common stock o the Samson Co. oer an expected total return o 1(;. The dividend is increasing at a constant 7; per year. The dividend yield must be+ #. -/;. %. /;. C. 7;. &. 1(;. '. (0;.

,(. The common stock o rady Co. had an 11.(; rate o return last year. The dividend amount !as :.50 a share !hich euated to a dividend yield o 1.;. Bhat !as the rate o price appreciation on the stock= #. 1.0; %. 7.00; C. 9.5; &. 11.(; '. 1(.5;

,,. Beisbro and Sons* common stock sells or :(1 a share and pays an annual dividend that increases by ; annually. The market rate o return on this stock is 9;. Bhat is the amount o the last dividend paid by Beisbro and Sons= #. :.55 %. :.70 C. :.7/ &. :.75 '. :.77

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,/. The common stock o 'nergi$er*s pays an annual dividend that is expected to increase by 10; annually. The stock commands a market rate o return o 1(; and sells or :40.0 a share. Bhat is the expected amount o the next dividend to be paid on 'nergi$er*s common stock= #. :.90 %. :1.00 C. :1.10 &. :1.(1 '. :1.,,

,. The
,4. # stock pays a constant annual dividend and sells or :,1.11 a share. 6 the dividend yield o this stock is 9;3 !hat is the dividend amount= #. :1./0 %. :1.70 C. :(.(0 &. :(./0 '. :(.70

,5. Aou have decided that you !ould like to o!n some shares o ? Corp. but need an expected 1(; rate o return to compensate or the perceived risk o such o!nership. Bhat is the maximum you are !illing to spend per share to buy ? stock i the company pays a constant :,.0 annual dividend per share= #. :(4.0/ %. :(9.15 C. :,(.45 &. :,/.(9 '. :,4.9

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,7. Turnips and 2arsley common stock sells or :,9.74 a share at a market rate o return o 9.;. The company ust paid its annual dividend o :1.(0. Bhat is the rate o gro!th o its dividend= #. .(; %. .; C. .9; &. 4.0; '. 4.,;

,9. %IJ 'nterprises !ill pay an annual dividend o :(.07 a share on its common stock next year. 8ast !eek3 the company paid a dividend o :(.00 a share. The company adheres to a constant rate o gro!th dividend policy. Bhat !ill one share o %IJ common stock be !o rth ten years rom no! i the applicable discount rate is 7;= #. :51.14 %. :5/.01 C. :54.95 &. :70.0 '. :7,.(

/0. Bilbert*s Clothing Stores ust paid a :1.(0 annual dividend. The company has a policy !hereby the dividend increases by (.; annually. Aou !ould like to purchase 100 shares o stock in this irm but reali$e that you !ill not have the unds to do so or another three years. 6 you desire a 10; rate o return3 ho! much should you expect to pay or 100 shares !hen you can aord to buy this stock= 6gnore trading costs. #. :134/0 %. :13471 C. :135(, &. :13544 '. :13710

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/1. The Gerri!eather Co. ust announced that it !ill pay a dividend next year o :1.40 and is establishing a policy !hereby the dividend !ill increase by ,.; annually thereater. ?o! much !ill one share be !orth ive years rom no! i the reuired rate o return is 1(;= #. :(1.40 %. :((.,4 C. :(,.1/ &. :(,.9 '. :(/.59

/(. The %ell Beather Co. is a ne! irm in a rapidly gro!ing industry. The company is planning on increasing its annual dividend by (0; a year or the next our years and then decreasing the gro!th rate to ; per year. The company ust paid its annual dividend in the amount o :1.00 per share. Bhat is the current value o one share i the reuired rate o return is 9.(;= #. :,.4, %. :,7.19 C. :/1.0 &. :/,.19 '. :/.71

/,. The 'xtreme
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//. Can*t ?old Ge %ack3 6nc. is preparing to pay its irst dividends. 6t is going to pay :1.003 :(.03 and :.00 a share over the next three years3 respectively. #ter that3 the company has stated that the annual dividend !ill be :1.( per share indeinitely. Bhat is this stock !orth to you per share i you demand a 5; rate o return= #. :5.(0 %. :1/./7 C. :17.77 &. :(1.57 '. :(.04

/. )H AH announced today that it !ill begin paying annual dividends. The irst dividend !ill be paid next year in the amount o :.( a share. The ollo!ing dividends !ill be :./03 :.403 and :.5 a share annually or the ollo!ing three years3 respectively. #ter that3 dividends are proected to increase by ,.; per year. ?o! much are you !illing to pay to buy one share o this stock i your desired rate o return is 1(;= #. :1./ %. :.70 C. :5.( &. :9.04 '. :10.7

/4. )o! or 8ater3 6nc. recently paid :1.10 as an annual dividend. >uture dividends are proected at :1.1/3 :1.173 :1.((3 and :1.( over the next our years3 respectively. #ter that3 the dividend is expected to increase by (; annually. Bhat is one share o this stock !orth to you i you reuire an 7; rate o return on similar investments= #. :1.4( %. :19.5 C. :(1.(1 &. :(,.,, '. :(.97

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/5. The
/7. %ill %ailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount o :.,0 a share or t!o years commencing t!o years rom today. #ter that time3 the company plans on paying a constant :1 a share dividend indeinitely. iven a reuired return o 1/;3 !hat is the value o this stock= #. :/.7( %. :.( C. :.,9 &. :./4 '. :.7

/9. The 8ighthouse Co. is in a do!nsi$ing mode. The company paid a :(.0 annual dividend last year. The company has announced plans to lo!er the dividend by :.0 a year. Dnce the dividend amount becomes $ero3 the company !ill cease all dividends permanently. The reuired rate o return is 14;. Bhat is one share o this stock !orth= #. :,.54 %. :/.07 C. :/.75 &. :.1, '. :.,9

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0. Gother and &aughter 'nterprises is a relatively ne! irm that appears to be on the road to great success. The company paid its irst annual dividend yesterday in the amount o :.(7 a share. The company plans to double each annual dividend payment or the next three years. #ter that time3 it is planning on paying a constant :1.0 per share indeinitely. Bhat is one share o this stock !orth today i the market rate o return on similar securities is 11.;= #. :9./1 %. :11./0 C. :11./4 &. :11.9, '. :1(./,

1. %C Kn & ust paid its annual dividend o :.40 a share. The proected dividends or the next ive years are :.,03 :.03 :.53 :1.003 and :1.(03 respectively. #ter that time3 the dividends !ill be held constant at :1./0. Bhat is this stock !orth today at a 4; discount rate= #. :(0./7 %. :(0.40 C. :(1.0( &. :(1.(7 '. :(1./,

(. %eaksley3 6nc. is a very cyclical type o business !hich is relected in its dividend policy. The irm pays a :(.00 a share dividend every other year. The last dividend !as paid last year. >ive years rom no!3 the company is repurchasing all o the outstanding shares at a price o :0 a share. #t an 7; rate o return3 !hat is this stock !orth today= #. :,/.0, %. :,5.(1 C. :/,.57 &. :/7.09 '. :,.17

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,. 8ast !eek3
/. )u-Tek3 6nc. is expecting a period o intense gro!th and has decided to retain more o its earnings to help inance that gro!th. #s a result it is going to reduce its annual dividend by 10; a year or the next three years. #ter that3 it !ill maintain a constant dividend o :.50 a share. 8ast month3 the company paid :1.70 per share. Bhat is the value o this stock i the reuired rate o return is 1,;= #. :4.59 %. :5.(( C. :7.(( &. :7.75 '. :9.01

. The &ouble &ip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus3 the company has announced that it !ill be reducing its annual dividend by ; a year or the next t!o years. #ter that3 it !ill maintain a constant dividend o :1 a share. T!o !eeks ago3 the company paid a dividend o :1./0 per share. Bhat is this stock !orth i you reuire a 9; rate o return= #. :10.74 %. :11.11 C. :11.4/ &. :1(.97 '. :1/.(,

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4. Bhich o the ollo!ing amounts is closest to !hat should be paid or Dverland common stock= Dverland has ust paid a dividend o :(.(. These dividends are expected to gro! at a rate o ; in the oreseeable uture. The reuired rate o return is 11;. #. :(0./ %. :(1./7 C. :,5.0 &. :,9.,7 '. :/5.50

5. Bhat !ould be the maximum an investor should pay or the common stock o a irm that has no gro!th opportunities but pays a dividend o :1.,4 per year= The next dividend !ill be paid in exactly 1 year. The reuired rate o return is 1(.;. #. :9.( %. :10.77 C. :1(.(/ &. :15.00 '. )one o the above

7. Gortgage 6nstruments 6nc. is expected to pay dividends o :1.0, next year. The company ust paid a dividend o :1. This gro!th rate is expected to continue. ?o! much should be paid or Gortgage 6nstruments stock ust ater the dividend i the appropriate discount rate is ;. #. :(0.00 %. :(1.0 C. :,/.5 &. :0.00 '. :1.0

9. The >elix Corp. proects to pay a dividend o :.5 next year and then have it gro! at 1(; or the ollo!ing , years beore gro!ing at 7; indeinitely thereater. The euity has a reuired return o 10; in the market. The price o the stock should be """". #. :9.,7 %. :15.0 C. :/1.45 &. :9.70 '. :4(.,7

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40. 6 a company paid a dividend o :0./0 last month and it is expected to gro! at 5; or the next 4 years and then gro! at /; thereater3 the dividend expected in year 7 is """. #. :0.4, %. :0.4 C. :0.47 &. :0.49 '. :0.5/

41. The 8ory Company had net earnings o :1(53000 this past year. &ividends o :,73100 !ere paid. The company*s euity !as :1375300. 6 8ory has 1003000 shares outstanding !ith a current market price o :11.4( per share3 and the gro!th rate is .4;3 !hat is the reuired rate o return= #. /.(; %. 4; C. 9; &. 1/; '. )one o the above

4(. &octors-Dn-Call3 a ne!ly ormed medical group3 ust paid a dividend o :.0. The company*s dividend is expected to gro! at a (0; rate or the next  years and at a ,; rate thereater. Bhat is the value o the stock i the appropriate discount rate is 1(;= #. :7.07 %. :11.15 C. :1/.(( &. :15.,( '. :,0.90

4,. # stock you are interested in paid a dividend o :1 last !eek. The anticipated gro!th rate in dividends and earnings is (0; or the next year and 10; the year ater that beore settling do!n to a constant ; gro!th rate. The discount rate is 1(;. Calculate the expected price o the stock. #. :15.(0 %. :15.90 C. :17.(0 &. :19./0 '. :19.5

9-17


4/. # stock you are interested in paid a dividend o :1 last month. The anticipated gro!th rate in dividends and earnings is (; or the next ( years beore settling do!n to a constant ; gro!th rate. The discount rate is 1(;. Calculate the expected price o the stock. #. :1.,7 %. :(0.0 C. :(1.0/ &. :((.(5 '. :(4.1/

4. Bhich o the ollo!ing values is closest to the amount that should be paid or a stock that !ill pay a dividend o :10 in one year and :11 in t!o years= The stock !ill be sold in ( years or an estimated price o :1(0. The appropriate discount rate is 9;. #. :11/.40 %. :119./, C. :1(/.(0 &. :1(9.0 '. :1,7.5

Essay Questions

44. Bhat are the components o the reuired rate o return on a share o stock= %riely explain each component.

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45. 'xplain !hether it is easier to ind the reuired return on a publicly traded stock or a publicly traded bond3 and explain !hy.

47. # number o publicly traded irms pay no dividends yet investors are !illing to buy shares in these irms. ?o! is this possible= &oes this violate our basic principle o stock valuation= 'xplain.

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Chapter 09 ?o! to Value Stocks #ns!er Jey

Multiple Choice Questions

1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess o the discount rate less the dividend gro!th rate is called the """"" model. #. $ero gro!th B. dividend gro!th C. capital pricing &. earnings capitali$ation '. dierential gro!th

Difficulty level: Easy Topic: DIVIDEND GROWTH MODEL Type: DEFINITIONS

(. )ext year*s annual dividend divided by the current stock price is called the+ #. yield to maturity. %. total yield. C. dividend yield. &. capital gains yield. '. earnings yield.

Difficulty level: Easy Topic: DIVIDEND YIELD Type: DEFINITIONS

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,. The rate at !hich a stock*s price is expected to appreciate or depreciate is called the """"" yield. #. current %. total C. dividend D. capital gains '. earnings

Difficulty level: Easy Topic: !"IT!L G!INS YIELD Type: DEFINITIONS

/. # orm o euity !hich receives no preerential treatment in either the payment o dividends or in bankruptcy distributions is called """"" stock. #. dual class %. cumulative C. deerred &. preerred E. common

Difficulty level: Easy Topic: OMMON STO# Type: DEFINITIONS


Difficulty level: Easy Topic: DIVIDENDS Type: DEFINITIONS

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4. The constant dividend gro!th model is+ #. generally used in practice because most stocks have a constant gro!th rate. %. generally used in practice because the historical gro!th rate o most stocks is constant. C. generally not used in practice because most stocks gro! at a non constant rate. &. generally not used in practice because the constant gro!th rate is usually higher than the reuired rate o return. '. based on the assumption &o! ,0 represents a good estimate o the market index.

Difficulty level: Me$iu% Topic: ONST!NT DIVIDEND GROWTH MODEL Type: ONE"TS

5. The constant dividend gro!th model+ 6. assumes that dividends increase at a constant rate orever. 66. can be used to compute a stock price at any point o time. 666. states that the market price o a stock is only aected by the amount o the dividend. 6V. considers capital gains but ignores the dividend yield. #. 6 only %. 66 only C. 666 and 6V only D. 6 and 66 only '. 63 663 and 666 only

Difficulty level: Me$iu% Topic: ONST!NT DIVIDEND GROWTH MODEL Type: ONE"TS

7. The underlying assumption o the dividend gro!th model is that a stock is !orth+ #. the same amount to every investor regardless o their desired rate o return. B. the present value o the uture income !hich the stock generates. C. an amount computed as the next annual dividend divided by the market rate o return. &. the same amount as any other stock that pays the same current dividend and has the same reuired rate o return. '. an amount computed as the next annual dividend divided by the reuired rate o return.

Difficulty level: Me$iu% Topic: DIVIDEND GROWTH MODEL Type: ONE"TS

9-(,


9. #ssume that you are using the dividend gro!th model to value stocks. 6 you expect the market rate o return to increase across the board on all euity securities3 then you should also expect the+ #. market values o all stocks to increase3 all else constant. %. market values o all stocks to remain constant as the dividend gro!th !ill oset the increase in the market rate. C. market values o all stocks to decrease3 all else constant. &. stocks that do not pay dividends to decrease in price !hile the dividend-paying stocks maintain a constant price. '. dividend gro!th rates to increase to oset this change.

Difficulty level: Me$iu% Topic: DIVIDEND GROWTH MODEL Type: ONE"TS

10. 8atcher*s 6nc. is a relatively ne! irm that is still in a period o rapid development. The company plans on retaining all o its earnings or the next six years. Seven years rom no!3 the company proects paying an annual dividend o :.( a share and then increasing that amount by ,; annually thereater. To value this stock as o today3 you !ould most likely determine the value o the stock """"" years rom today beore determining today*s value. #. / %.  C. 4 &. 5 '. 7

Difficulty level: Me$iu% Topic: DIFFERENTI!L GROWTH Type: ONE"TS

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11. The

1(. &ierential gro!th reers to a irm that increases its dividend by+ #. three or more percent per year. B. a rate !hich is most likely not sustainable over an extended period o time. C. a constant rate o t!o or more percent per year. &. :.10 or more per year. '. an amount in excess o :.10 a year.


1,. The total rate o return earned on a stock is comprised o !hich t!o o the ollo!ing= 6. current yield 66. yield to maturity 666. dividend yield 6V. capital gains yield #. 6 and 66 only %. 6 and 6V only C. 66 and 666 only &. 66 and 6V only E. 666 and 6V only

Difficulty level: Me$iu% Topic: DIVIDEND YIELD !ND !"IT!L G!INS Type: ONE"TS

9-(


1/. >red >lintlock !ants to earn a total o 10; on his investments. ?e recently purchased shares o #%C stock at a price o :(0 a share. The stock pays a :1 a year dividend. The price o #%C stock needs to """"" i >red is to achieve his 10; rate o return. #. remain constant %. decrease by ; C. increase by ; &. increase by 10; '. increase by 1;

Difficulty level: Me$iu% Topic: DIVIDEND YIELD !ND !"IT!L G!INS Type: ONE"TS

1. The Scott Co. has a general dividend policy !hereby it pays a constant annual dividend o :1 per share o common stock. The irm has 13000 shares o stock outstanding. The company+ #. must al!ays sho! a current liability o :13000 or dividends payable. %. is obligated to continue paying :1 per share per year. C. !ill be declared in deault and can ace bankruptcy i it does not pay :1 per year to each shareholder on a timely basis. &. has a liability !hich must be paid at a later date should the company miss paying an annual dividend payment. E. must still declare each dividend beore it becomes an actual company liability.

Difficulty level: Me$iu% Topic: DIVIDENDS Type: ONE"TS

14. The value o common stock today depends on+ #. the expected uture holding period and the discount rate. %. the expected uture dividends and the capital gains. C. the expected uture dividends3 capital gains and the discount rate. &. the expected uture holding period and capital gains. '. )one o the above.

Difficulty level: Me$iu% Topic: OMMON STO# V!L&ES Type: ONE"TS

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15. The closing price o a stock is uoted at ((.753 !ith a 2@' o (4 and a net change o 1./(. %ased on this inormation3 !hich one o the ollo!ing statements is correct= #. The closing price on the previous day !as :1./( higher than today*s closing price. %. # dealer !ill buy the stock at :((.75 and sell it at :(4 a share. C. The stock increased in value bet!een yesterday*s close and today*s close by :.01/(. D. The earnings per share are eual to 1@(4th o :((.75. '. The earnings per share have increased by :1./( this year.

Difficulty level: Me$iu% Topic: STO# M!R#ET RE"ORTING Type: ONE"TS

17. # stock listing contains the ollo!ing inormation+ 2@' 15.3 closing price ,,.103 dividend .703 AT&; chg ,./3 and net chg - .0. Bhich o the ollo!ing statements are correct given this inormation= 6. The stock price has increased by ,./; during the current year. 66. The closing price on the previous trading day !as :,(.40. 666. The earnings per share are approximately :1.79. 6V. The current yield is 15.;. #. 6 and 66 only B. 6 and 666 only C. 66 and 666 only &. 666 and 6V only '. 63 6663 and 6V only

Difficulty level: Me$iu% Topic: STO# '&OTE Type: ONE"TS

19. The discount rate in euity valuation is composed entirely o+ #. the dividends paid and the capital gains yield. B. the dividend yield and the gro!th rate. C. the dividends paid and the gro!th rate. &. the capital gains earned and the gro!th rate. '. the capital gains earned and the dividends paid.

Difficulty level: Me$iu% Topic: DISO&NT R!TE Type: ONE"TS

9-(5


(0. The net present value o a gro!th opportunity3 )2VD3 can be deined as+ #. the initial investment necessary or a ne! proect. B. the net present value per share o an investment in a ne! proect. C. a continual reinvestment o earnings !hen r E g. &. a single period investment !hen r F g. '. )one o the above.

Difficulty level: Me$iu% Topic: N"VGO Type: ONE"TS

(1. #ngelina*s made t!o announcements concerning its common stock today. >irst3 the company announced that its next annual dividend has been set at :(.14 a share. Secondly3 the company announced that all uture dividends !ill increase by /; annually. Bhat is the maximum amount you should pay to purchase a share o #ngelina*s stock i your goal is to earn a 10; rate o return= #. :(1.40 %. :((./4 C. :(5.// &. :,/.4( E. :,4.00

Difficulty level: Easy Topic: STO# V!L&E ( ONST!NT GROWTH Type: "RO)LEMS

9-(7


((. ?o! much are you !illing to pay or one share o stock i the company ust paid an :.70 annual dividend3 the dividends increase by /; annually and you reuire an 7; rate o return= #. :19.(, %. :(0.00 C. :(0./0 D. :(0.70 '. :(1.4,


(,. 8ee ?ong 6mports paid a :1.00 per share annual dividend last !eek. &ividends are expected to increase by ; annually. Bhat is one share o this stock !orth to you today i the appropriate discount rate is 1/;= #. :5.1/ %. :5.0 C. :11.11 D. :11.45 '. :1(.(


9-(9


(/. Gaestic ?omes* stock traditionally provides an 7; rate o return. The company ust paid a :( a year dividend !hich is expected to increase by ; per year. 6 you are planning on buying 13000 shares o this stock next year3 ho! much should you expect to pay per share i the market rate o return or this type o security is 9; at the time o your purchase= #. :/7.40 %. :(.0 C. :.1, &. :5.79 '. :50.00


(. 8eslie*s Hniue Clothing Stores oers a common stock that pays an annual dividend o :(.00 a share. The company has promised to maintain a constant dividend. ?o! much are you !illing to pay or one share o this stock i you !ant to earn a 1(; return on your euity investments= #. :10.00 %. :1,.,, C. :14.45 &. :17.77 '. :(0.00

Difficulty level: Easy Topic: STO# V!L&E ( *ERO GROWTH Type: "RO)LEMS

9-,0


(4. Gartin*s Aachts has paid annual dividends o :1./03 :1.53 and :(.00 a share over the past three years3 respectively. The company no! predicts that it !ill maintain a constant dividend since its business has leveled o and sales are expected to remain relatively constant. iven the lack o uture gro!th3 you !ill only buy this stock i you can earn at least a 1; rate o return. Bhat is the maximum amount you are !illing to pay to buy one share today= #. :10.00 B. :1,.,, C. :14.45 &. :17.77 '. :(0.00

Difficulty level: Me$iu% Topic: STO# V!L&E ( *ERO GROWTH Type: "RO)LEMS

(5. The common stock o 'ddie*s 'ngines3 6nc. sells or :(.51 a share. The stock is expected to pay :1.70 per share next month !hen the annual dividend is distributed. 'ddie*s has established a pattern o increasing its dividends by /; annually and expects to continue doing so. Bhat is the market rate o return on this stock= #. 5; %. 9; C. 11; &. 1,; '. 1;

Difficulty level: Me$iu% Topic: RE'&IRED RET&RN Type: "RO)LEMS

9-,1


(7. The current yield on #lpha*s common stock is /.7;. The company ust paid a :(.10 dividend. The rumor is that the dividend !ill be :(.(0 next year. The dividend gro!th rate is expected to remain constant at the current level. Bhat is the reuired rate o return on #lpha*s stock= A. 10.0/; %. 14.05; C. (1.77; &. /,.5; '. /.9/;


(9. Gartha*s Vineyard recently paid a :,.40 annual dividend on its common stock. This dividend increases at an average rate o ,.; per year. The stock is currently selling or :4(.10 a share. Bhat is the market rate o return= #. (.; %. ,.; C. .; &. 4.0; E. 9.;


9-,(


,0. %et*< %ilt %ikes ust announced that its annual dividend or this coming year !ill be :(./( a share and that all uture dividends are expected to increase by (.; annually. Bhat is the market rate o return i this stock is currently selling or :(( a share= #. 9.; %. 11.0; C. 1(.; D. 1,.; '. 1.0;


,1. Shares o common stock o the Samson Co. oer an expected total return o 1(;. The dividend is increasing at a constant 7; per year. The dividend yield must be+ #. -/;. B. /;. C. 7;. &. 1(;. '. (0;.

Difficulty level: Me$iu% Topic: DIVIDEND YIELD VS+ !"IT!L G!INS YIELD Type: "RO)LEMS

9-,,


,(. The common stock o rady Co. had an 11.(; rate o return last year. The dividend amount !as :.50 a share !hich euated to a dividend yield o 1.;. Bhat !as the rate o price appreciation on the stock= #. 1.0; %. 7.00; C. 9.5; &. 11.(; '. 1(.5; g L .11( - .01 L .095 L 9.5;

Difficulty level: Easy Topic: !"IT!L G!IN Type: "RO)LEMS

,,. Beisbro and Sons* common stock sells or :(1 a share and pays an annual dividend that increases by ; annually. The market rate o return on this stock is 9;. Bhat is the amount o the last dividend paid by Beisbro and Sons= #. :.55 B. :.70 C. :.7/ &. :.75 '. :.77

Difficulty level: Me$iu% Topic: DIVIDEND !MO&NT Type: "RO)LEMS

9-,/


,/. The common stock o 'nergi$er*s pays an annual dividend that is expected to increase by 10; annually. The stock commands a market rate o return o 1(; and sells or :40.0 a share. Bhat is the expected amount o the next dividend to be paid on 'nergi$er*s common stock= #. :.90 %. :1.00 C. :1.10 D. :1.(1 '. :1.,,


,. The

9-,


,4. # stock pays a constant annual dividend and sells or :,1.11 a share. 6 the dividend yield o this stock is 9;3 !hat is the dividend amount= #. :1./0 %. :1.70 C. :(.(0 &. :(./0 E. :(.70

Difficulty level: Me$iu% Topic: ONST!NT DIVIDEND Type: "RO)LEMS

,5. Aou have decided that you !ould like to o!n some shares o ? Corp. but need an expected 1(; rate o return to compensate or the perceived risk o such o!nership. Bhat is the maximum you are !illing to spend per share to buy ? stock i the company pays a constant :,.0 annual dividend per share= #. :(4.0/ B. :(9.15 C. :,(.45 &. :,/.(9 '. :,4.9

Difficulty level: Me$iu% Topic: ONST!NT DIVIDEND Type: "RO)LEMS

9-,4


,7. Turnips and 2arsley common stock sells or :,9.74 a share at a market rate o return o 9.;. The company ust paid its annual dividend o :1.(0. Bhat is the rate o gro!th o its dividend= #. .(; %. .; C. .9; &. 4.0; E. 4.,;

Difficulty level: Me$iu% Topic: GROWTH DIVIDEND Type: "RO)LEMS

,9. %IJ 'nterprises !ill pay an annual dividend o :(.07 a share on its common stock next year. 8ast !eek3 the company paid a dividend o :(.00 a share. The company adheres to a constant rate o gro!th dividend policy. Bhat !ill one share o %IJ common stock be !o rth ten years rom no! i the applicable discount rate is 7;= #. :51.14 %. :5/.01 C. :54.95 &. :70.0 '. :7,.(

Difficulty level: ,alle-.e Topic: GROWTH DIVIDEND Type: "RO)LEMS

9-,5


/0. Bilbert*s Clothing Stores ust paid a :1.(0 annual dividend. The company has a policy !hereby the dividend increases by (.; annually. Aou !ould like to purchase 100 shares o stock in this irm but reali$e that you !ill not have the unds to do so or another three years. 6 you desire a 10; rate o return3 ho! much should you expect to pay or 100 shares !hen you can aord to buy this stock= 6gnore trading costs. #. :134/0 %. :13471 C. :135(, D. :13544 '. :13710

2, L :15.44M 2urchase cost L 100 × :15.44 L :13544


/1. The Gerri!eather Co. ust announced that it !ill pay a dividend next year o :1.40 and is establishing a policy !hereby the dividend !ill increase by ,.; annually thereater. ?o! much !ill one share be !orth ive years rom no! i the reuired rate o return is 1(;= #. :(1.40 B. :((.,4 C. :(,.1/ &. :(,.9 '. :(/.59

2 L :((.,4


9-,7


/(. The %ell Beather Co. is a ne! irm in a rapidly gro!ing industry. The company is planning on increasing its annual dividend by (0; a year or the next our years and then decreasing the gro!th rate to ; per year. The company ust paid its annual dividend in the amount o :1.00 per share. Bhat is the current value o one share i the reuired rate o return is 9.(;= #. :,.4, %. :,7.19 C. :/1.0 &. :/,.19 '. :/.71 &ividends or the irst / years are+ :1.(03 :1.//3 :1.5(73 and :(.05,4.

Difficulty level: ,alle-.e Topic: DIFFERENTI!L GROWTH DIVIDENDS Type: "RO)LEMS

/,. The 'xtreme

9-,9


//. Can*t ?old Ge %ack3 6nc. is preparing to pay its irst dividends. 6t is going to pay :1.003 :(.03 and :.00 a share over the next three years3 respectively. #ter that3 the company has stated that the annual dividend !ill be :1.( per share indeinitely. Bhat is this stock !orth to you per share i you demand a 5; rate o return= #. :5.(0 %. :1/./7 C. :17.77 D. :(1.57 '. :(.04


/. )H AH announced today that it !ill begin paying annual dividends. The irst dividend !ill be paid next year in the amount o :.( a share. The ollo!ing dividends !ill be :./03 :.403 and :.5 a share annually or the ollo!ing three years3 respectively. #ter that3 dividends are proected to increase by ,.; per year. ?o! much are you !illing to pay to buy one share o this stock i your desired rate o return is 1(;= #. :1./ %. :.70 C. :5.( &. :9.04 '. :10.7


9-/0


/4. )o! or 8ater3 6nc. recently paid :1.10 as an annual dividend. >uture dividends are proected at :1.1/3 :1.173 :1.((3 and :1.( over the next our years3 respectively. #ter that3 the dividend is expected to increase by (; annually. Bhat is one share o this stock !orth to you i you reuire an 7; rate o return on similar investments= #. :1.4( B. :19.5 C. :(1.(1 &. :(,.,, '. :(.97


/5. The

9-/1


/7. %ill %ailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount o :.,0 a share or t!o years commencing t!o years rom today. #ter that time3 the company plans on paying a constant :1 a share dividend indeinitely. iven a reuired return o 1/;3 !hat is the value o this stock= #. :/.7( B. :.( C. :.,9 &. :./4 '. :.7


/9. The 8ighthouse Co. is in a do!nsi$ing mode. The company paid a :(.0 annual dividend last year. The company has announced plans to lo!er the dividend by :.0 a year. Dnce the dividend amount becomes $ero3 the company !ill cease all dividends permanently. The reuired rate o return is 14;. Bhat is one share o this stock !orth= A. :,.54 %. :/.07 C. :/.75 &. :.1, '. :.,9


9-/(


0. Gother and &aughter 'nterprises is a relatively ne! irm that appears to be on the road to great success. The company paid its irst annual dividend yesterday in the amount o :.(7 a share. The company plans to double each annual dividend payment or the next three years. #ter that time3 it is planning on paying a constant :1.0 per share indeinitely. Bhat is one share o this stock !orth today i the market rate o return on similar securities is 11.;= #. :9./1 %. :11./0 C. :11./4 &. :11.9, E. :1(./, &ividends or the next three years are :.43 :1.1(3 and :(.(/.


1. %C Kn & ust paid its annual dividend o :.40 a share. The proected dividends or the next ive years are :.,03 :.03 :.53 :1.003 and :1.(03 respectively. #ter that time3 the dividends !ill be held constant at :1./0. Bhat is this stock !orth today at a 4; discount rate= A. :(0./7 %. :(0.40 C. :(1.0( &. :(1.(7 '. :(1./,


9-/,


(. %eaksley3 6nc. is a very cyclical type o business !hich is relected in its dividend policy. The irm pays a :(.00 a share dividend every other year. The last dividend !as paid last year. >ive years rom no!3 the company is repurchasing all o the outstanding shares at a price o :0 a share. #t an 7; rate o return3 !hat is this stock !orth today= #. :,/.0, B. :,5.(1 C. :/,.57 &. :/7.09 '. :,.17


,. 8ast !eek3
Difficulty level: Me$iu% Topic: NEG!TIVE GROWTH Type: "RO)LEMS

9-//


/. )u-Tek3 6nc. is expecting a period o intense gro!th and has decided to retain more o its earnings to help inance that gro!th. #s a result it is going to reduce its annual dividend by 10; a year or the next three years. #ter that3 it !ill maintain a constant dividend o :.50 a share. 8ast month3 the company paid :1.70 per share. Bhat is the value o this stock i the reuired rate o return is 1,;= #. :4.59 B. :5.(( C. :7.(( &. :7.75 '. :9.01

Difficulty level: ,alle-.e Topic: NEG!TIVE GROWTH Type: "RO)LEMS

. The &ouble &ip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus3 the company has announced that it !ill be reducing its annual dividend by ; a year or the next t!o years. #ter that3 it !ill maintain a constant dividend o :1 a share. T!o !eeks ago3 the company paid a dividend o :1./0 per share. Bhat is this stock !orth i you reuire a 9; rate o return= #. :10.74 %. :11.11 C. :11.4/ &. :1(.97 '. :1/.(,

Difficulty level: ,alle-.e Topic: NEG!TIVE GROWTH Type: "RO)LEMS

9-/


4. Bhich o the ollo!ing amounts is closest to !hat should be paid or Dverland common stock= Dverland has ust paid a dividend o :(.(. These dividends are expected to gro! at a rate o ; in the oreseeable uture. The reuired rate o return is 11;. #. :(0./ %. :(1./7 C. :,5.0 D. :,9.,7 '. :/5.50 Value o stock L &01 N g@r - g L :(.(1 N 0.0@0.11 - 0.0 L :,9.,5

Difficulty level: Me$iu% Topic: ONST!NT GROWTH STO# V!L&!TION Type: "RO)LEMS

5. Bhat !ould be the maximum an investor should pay or the common stock o a irm that has no gro!th opportunities but pays a dividend o :1.,4 per year= The next dividend !ill be paid in exactly 1 year. The reuired rate o return is 1(.;. #. :9.( B. :10.77 C. :1(.(/ &. :15.00 '. )one o the above :1.,[email protected]( L :10.77

Difficulty level: Easy Topic: STO# V!L&!TION/"ER"ET&ITY Type: "RO)LEMS

9-/4


7. Gortgage 6nstruments 6nc. is expected to pay dividends o :1.0, next year. The company ust paid a dividend o :1. This gro!th rate is expected to continue. ?o! much should be paid or Gortgage 6nstruments stock ust ater the dividend i the appropriate discount rate is ;. #. :(0.00 %. :(1.0 C. :,/.5 &. :0.00 E. :1.0 g L &1 - &0@&0 L :1.0, - :1.00@:1.00 L 0.0, g L ,; Value o stock L &1@r - g L :1.0,@0.0 - 0.0, L :1.0

Difficulty level: Me$iu% Topic: ONST!NT GROWTH STO# V!L&!TION Type: "RO)LEMS

9. The >elix Corp. proects to pay a dividend o :.5 next year and then have it gro! at 1(; or the ollo!ing , years beore gro!ing at 7; indeinitely thereater. The euity has a reuired return o 10; in the market. The price o the stock should be """". #. :9.,7 %. :15.0 C. :/1.45 &. :9.70 '. :4(.,7 Value o stock L O:.5@1.1 N :.7/@1.1( N :.9/@1.1, N :1.0@1.1/ N :1.1,@.0(@ 1.1/ L :/1.45

Difficulty level: ,alle-.e Topic: DIFFERENTI!L STO# V!L&!TION Type: "RO)LEMS

9-/5


40. 6 a company paid a dividend o :0./0 last month and it is expected to gro! at 5; or the next 4 years and then gro! at /; thereater3 the dividend expected in year 7 is """. #. :0.4, B. :0.4 C. :0.47 &. :0.49 '. :0.5/ &iv7 L :./P1 N .054 1.0/( L :.4

Difficulty level: Me$iu% Topic: FORE!STED DIVIDEND "!YMENT Type: "RO)LEMS

41. The 8ory Company had net earnings o :1(53000 this past year. &ividends o :,73100 !ere paid. The company*s euity !as :1375300. 6 8ory has 1003000 shares outstanding !ith a current market price o :11.4( per share3 and the gro!th rate is .4;3 !hat is the reuired rate o return= #. /.(; %. 4; C. 9; &. 1/; '. )one o the above < L &iv@20 N g L .,711.04@11.4( N .04 L ./[email protected]( N .04 L .0,/4 N .04 L .0904 L 9;


9-/7


4(. &octors-Dn-Call3 a ne!ly ormed medical group3 ust paid a dividend o :.0. The company*s dividend is expected to gro! at a (0; rate or the next  years and at a ,; rate thereater. Bhat is the value o the stock i the appropriate discount rate is 1(;= #. :7.07 B. :11.15 C. :1/.(( &. :15.,( '. :,0.90 Aears 1-+ :.01.(t@1.1(t N 1.([email protected]@1.1( L :11.15

Difficulty level: ,alle-.e Topic: DIFFERENTI!L GROWTH V!L&!TION Type: "RO)LEMS

4,. # stock you are interested in paid a dividend o :1 last !eek. The anticipated gro!th rate in dividends and earnings is (0; or the next year and 10; the year ater that beore settling do!n to a constant ; gro!th rate. The discount rate is 1(;. Calculate the expected price o the stock. #. :15.(0 B. :15.90 C. :17.(0 &. :19./0 '. :19.5 2rice L :1.001.(0@1.1( N :1.(01.100@1.(// N O:1.,(1.0@.1( - .0Q@1.(// L :15.90


9-/9


4/. # stock you are interested in paid a dividend o :1 last month. The anticipated gro!th rate in dividends and earnings is (; or the next ( years beore settling do!n to a constant ; gro!th rate. The discount rate is 1(;. Calculate the expected price o the stock. #. :1.,7 %. :(0.0 C. :(1.0/ &. :((.(5 '. :(4.1/ 2rice L :1.001.(@1.1( N :1.(1.(@1.(// N O:1.4(1.0@.1( - .0Q@1.(// L :(1.0/


4. Bhich o the ollo!ing values is closest to the amount that should be paid or a stock that !ill pay a dividend o :10 in one year and :11 in t!o years= The stock !ill be sold in ( years or an estimated price o :1(0. The appropriate discount rate is 9;. #. :11/.40 B. :119./, C. :1(/.(0 &. :1(9.0 '. :1,7.5 Value o stock L &1@1 N r N & ( N 2(@1 N r( L :10@1 N 0.09 N :11 N :1(0@1 N 0.09 ( L :119./,

Difficulty level: Me$iu% Topic: STO# V!L&!TION Type: "RO)LEMS

Essay Questions

9-0

Chap009.doc

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