Chapter 08 - Stock Valuation
Chapter 08 Stock Valuation Valuation Multiple Choice Questions
1. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend ro!th rate, and the applicable discount rate" #. $ero ro!th %. dividend ro!th C. capital pricin &. earnins capitali$ation '. discounted dividend
(. Which one of the follo!in is computed b) dividin next )ear*s annual dividend b) the current stock price" #. )ield to maturit) %. total )ield C. dividend )ield &. capital ains )ield '. ro!th rate
+. Which one of follo!in is the rate at !hich a stock*s price is expected to appreciate" #. current )ield %. total return C. dividend )ield &. capital ains )ield '. coupon rate
. Which one of the follo!in t)pes of stock is defined b) the fact that it receives no preferential treatment in respect to either dividends or bankruptc) proceedins" #. dual class %. cumulative C. non-cumulative &. preferred '. common
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Chapter 08 - Stock Valuation
. # compan) has t!o open seats, Seat # and Seat %, on its board of directors. here are / candidates v)in for these ( positions. here !ill be a sinle election to determine the !inner of both open seats. #s the o!ner of 100 shares of stock, )ou !ill receive one vote per pe r share for each open seat. ou ou decide to cast all (00 of )our votes for a sinle candidate. What is this t)pe of votin called" #. democratic %. cumulative C. straiht &. deferred '. prox)
/. ou ou !ant to be on the board of directors of Wisel) oods. Since )ou are the onl) shareholder that !ill vote for )ou, )ou !ill need to o!n more than half of the outstandin shares of stock if )ou are to be elected to the board. What is the t)pe of votin called that re2uires this level of stock o!nership to be successfull) elected under these conditions" #. democratic %. cumulative C. straiht &. deferred '. prox)
3. ou ou cannot attend the shareholder*s meetin for #lpha 4nited so )ou authori$e another shareholder to vote on )our behalf. b ehalf. What is the rantin of this authorit) called" #. alterin %. cumulative votin C. straiht votin &. indenture areement '. votin b) prox)
8. What are the distributions to shareholders b) a corporation called" #. retained earnins %. net income C. dividends &. capital pa)ments '. diluted profits
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Chapter 08 - Stock Valuation
. # compan) has t!o open seats, Seat # and Seat %, on its board of directors. here are / candidates v)in for these ( positions. here !ill be a sinle election to determine the !inner of both open seats. #s the o!ner of 100 shares of stock, )ou !ill receive one vote per pe r share for each open seat. ou ou decide to cast all (00 of )our votes for a sinle candidate. What is this t)pe of votin called" #. democratic %. cumulative C. straiht &. deferred '. prox)
/. ou ou !ant to be on the board of directors of Wisel) oods. Since )ou are the onl) shareholder that !ill vote for )ou, )ou !ill need to o!n more than half of the outstandin shares of stock if )ou are to be elected to the board. What is the t)pe of votin called that re2uires this level of stock o!nership to be successfull) elected under these conditions" #. democratic %. cumulative C. straiht &. deferred '. prox)
3. ou ou cannot attend the shareholder*s meetin for #lpha 4nited so )ou authori$e another shareholder to vote on )our behalf. b ehalf. What is the rantin of this authorit) called" #. alterin %. cumulative votin C. straiht votin &. indenture areement '. votin b) prox)
8. What are the distributions to shareholders b) a corporation called" #. retained earnins %. net income C. dividends &. capital pa)ments '. diluted profits
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Chapter 08 - Stock Valuation
5. Which one of the follo!in is a t)pe of e2uit) securit) that has a fixed dividend and a priorit) status over other e2uit) securities" securities" #. senior bond %. debenture C. !arrant &. common stock '. preferred stock
10. Callander 'nterprises stock is listed on 6#S. he firm is plannin to issue some n e! e2uit) shares for sale to the eneral public. his sale !ill occur in !hich one of the follo!in markets" #. private %. auction C. exchane floor &. secondar) '. primar)
11. he secondar) market is best defined b) !hich one of the follo!in" #. market in !hich subordinated shares are issued and a nd resold %. market conducted solel) b) brokers C. market dominated b) dealers &. market !here outstandin shares of stock are resold '. market !here !arrants are offered and sold
1(. #n aent !ho maintains an inventor) from !hich he or she bu)s and sells securities is called a #. broker. %. trader. C. capitalist. &. principal. '. dealer.
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Chapter 08 - Stock Valuation
1+. #n aent !ho arranes a transaction bet!een a bu)er and a seller of e2uit) securities is called a #. broker. %. floor trader. C. capitalist. &. principal. '. dealer.
1. he o!ner of one of the 1,+// tradin licenses for the 6S' is called a #. broker. %. member. C. aent. &. specialist. '. dealer.
1. he person on the floor of the 6S' !ho executes bu) and sell orders on behalf of customers is called a9n: #. floor trader. %. dealer. C. specialist. &. executor. '. commission broker.
1/. # market maker !ho acts as a dealer in one or more securities on the floor of the 6S' is called a #. floor trader. %. floor post. C. specialist. &. floor broker. '. commission broker.
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Chapter 08 - Stock Valuation
13. # floor broker on the 6S' does !hich one of the follo!in" #. supervises the commission brokers for a financial firm %. trades for his or her personal inventor) C. executes orders on behalf of a commission broker &. maintains an inventor) and takes the role of a specialist '. is chared !ith maintainin a li2uid, orderl) market
18. #n individual on the floor of the 6S' !ho o!ns a tradin license and bu)s and sells for his or her personal account is called a #. floor trader. %. exchane customer. C. specialist. &. floor broker. '. market maker.
15. Which one of the follo!in is the electronic s)stem used b) the 6S' for directl) transmittin orders to specialists" #. ;C&; %. Super&; C.
(0. he stream of customer orders comin in to the 6S' tradin floor is called the #. paper trail. %. tradin volume. C. order flo!. &. bid-ask spread. '. commission trail.
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Chapter 08 - Stock Valuation
(1. he counter area on the floor of the 6S' !here a specialist operates is called a #. pit. %. hot spot. C. seat. &. post. '. &;.
((. # securities market primaril) comprised of dealers !ho bu) and sell for their o!n inventories is referred to !hich t)pe of market" #. auction %. private C. over-the-counter &. reional '. electronic net!ork
(+. #n 'C6 is best described as #. an electronic net!ork !hich transmits orders directl) to the floor of the 6S'. %. the net!ork used in the primar) market for sellin ne!l) issued shares. C. the international tradin net!ork of the 6S'. &. a !ebsite that allo!s individual investors to trade directl) !ith one another. '. a computeri$ed net!ork used b) independent brokers.
(. 6ational ruckin has paid an annual dividend of =1.00 per share on its common stock for the past fifteen )ears and is expected to continue pa)in a dollar a share lon into the future. >iven this, one share of the firm*s stock is #. basicall) !orthless as it offers no ro!th potential. %. e2ual in value to the present value of =1 paid one )ear from toda). C. priced the same as a =1 perpetuit). &. valued at an assumed ro!th rate of one percent. '. !orth =1 a share in the current market.
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Chapter 08 - Stock Valuation
(. #n increase in !hich of the follo!in !ill increase the current value of a stock accordin to the dividend ro!th model" <. dividend amount <<. number of future dividends, provided the current number is less than infinite <<<. discount rate
(/. ?ih Countr) %uilders currentl) pa)s an annual dividend of =1.+ and plans on increasin that amount b) (. percent each )ear. Valle) ?ih %uilders currentl) pa)s an annual dividend of =1.(0 and plans on increasin its dividend b) + percent annuall). >iven this information, )ou kno! for certain that the stock of ?ih Countr) %uilders* has a hiher @@@@@@ than the stock of Valle) ?ih %uilders. #. market price %. dividend )ield C. capital ains )ield &. total return '. he ans!er cannot be determined based on the information provided.
(3. he dividend ro!th model <. assumes that dividends increase at a constant rate forever. <<. can be used to compute a stock price at an) point in time. <<<. can be used to value $ero-ro!th stocks.
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Chapter 08 - Stock Valuation
(8. Which one of the follo!in is an underl)in assumption of the dividend ro!th model" #. # stock has the same value to ever) investor. %. # stock*s value is e2ual to the discounted present value of the future cash flo!s !hich it enerates. C. # stock*s value chanes in direct relation to the re2uired return. &. Stocks that pa) the same annual dividend have e2ual market values. '. he dividend ro!th rate is inversel) related to a stock*s market price.
(5. #ns!er this 2uestion based on the dividend ro!th model.
+0. Which one of the follo!in statements is correct concernin the t!o-stae dividend ro!th model" #. >1 cannot be neative. %. At B &tD. C. >1 must be reater than > (. &. >1 can be reater than D. '. D must be less than > 1 but reater than >(.
+1. Which one of the follo!in statements is correct" #. he capital ains )ield is the annual rate of chane in a stock*s price. %. Areferred stocks have constant ro!th dividends. C. # constant dividend stock cannot be valued usin the dividend ro!th model. &. he dividend ro!th model can be used to compute the current value of an) stock. '. #n increase in the re2uired return !ill decrease the capital ains )ield.
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Chapter 08 - Stock Valuation
+(. Supernormal ro!th is a ro!th rate that #. is both positive and follo!s a )ear or more of neative ro!th. %. exceeds a firm*s previous )ear*s rate of ro!th. C. is enerall) constant for an infinite period of time. &. is unsustainable over the lon term. '. applies to a sinle, abnormal )ear.
++. Which one of the follo!in represents the capital ains )ield as used in the dividend ro!th model" #. &1 %. &1A0 C. A0 &. '. A0
+. Winston Co. has a dividend-pa)in stock !ith a total return for the )ear of -/. percent. Which one of the follo!in must be true" #. he dividend must be constant. %. he stock has a neative capital ains )ield. C. he dividend )ield must be $ero. &. he re2uired rate of return for this stock increased over the )ear. '. he firm is experiencin supernormal ro!th.
+. he t!o-stae dividend ro!th model evaluates the current price of a stock based on the assumption a stock !ill #. pa) an increasin dividend for a period of time and then cease pa)in dividends altoether. %. increase the dividend amount ever) other )ear. C. pa) a constant dividend for the first t!o 2uarters of each )ear and then increase the dividend the last t!o 2uarters of each )ear. &. ro! at a fixed rate for a period of time after !hich it !ill ro! at a different rate indefinitel). '. pa) increasin dividends for a fixed period of time, cease pa)in dividends for a period of time, and then commence pa)in increasin dividends for an indefinite period of time.
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Chapter 08 - Stock Valuation
+/. Which one of the follo!in sets of dividend pa)ments best meets the definition of t!ostae ro!th as it applies to the t!o-stae dividend ro!th model" #. no dividends for )ears, then increasin dividends forever %. =1 per share annual dividend for ( )ears, then =1.( annual dividends forever C. decreasin dividends for / )ears follo!ed b) one final li2uidatin dividend pa)ment &. dividends pa)ments !hich increase b) (, +, and percent respectivel) for + )ears follo!ed b) a constant dividend thereafter '. dividend pa)ments !hich increase b) 10 percent per )ear for )ears follo!ed b) dividends !hich increase b) + percent annuall) thereafter
+3. Which one of the follo!in rihts is never directl) ranted to all shareholders of a publicl)-held corporation" #. electin the board of directors %. receivin a distribution of compan) profits C. votin either for or aainst a proposed merer or ac2uisition &. determinin the amount of the dividend to be paid per share '. havin first chance to purchase an) ne! e2uit) shares that ma) be offered
+8. Een o!ns +0 shares of stock in &elta ashions and !ants to !in a seat on the board of directors. he firm has a total of 100 shares of stock outstandin. 'ach share receives one vote. Aresentl), the compan) is votin to elect three ne! directors. Which one of the follo!in statements must be true iven this information" #. Deardless of the votin procedure, Een does not o!n enouh shares to ain a seat on the board. %.
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Chapter 08 - Stock Valuation
+5. he %lue Farlin is o!ned b) a roup of shareholders !ho all vote independentl) and !ho all !ant personal control over the firm. What is the minimum percentae of the outstandin shares one of these shareholders must o!n if he or she is to ain personal control over this firm iven that the firm uses straiht votin" #. 13 percent %. (0 percent plus one vote C. ( percent plus one vote &. 0 percent plus one vote '. 1 percent
0. Chemical Fines has ,000 shareholders and is preparin to elect t!o ne! board members. ou do not o!n enouh shares to personall) control the elections but are determined to oust the current leadership. Gike!ise, no other sinle shareholder o!ns sufficient shares to personall) control the outcome of the election. Which one of the follo!in is the most likel) outcome of this situation iven that some shareholders are happ) !ith the existin manaement" #. neotiated settlement !here each side is ranted control over one of the open seats %. protracted leal battle over control of the board of directors C. arbitrated settlement !here the arbitrator determines !ho !ill be elected to the board &. control of the board decided !ithout )our influence '. prox) fiht for control of the board
1. ?ard) Gumber has a capital structure !hich includes bonds, preferred stock, and common stock. Which of the follo!in rihts have most likel) been ranted to the preferred shareholders" <. riht to share in compan) profits prior to other shareholders <<. riht to elect the corporate directors <<<. riht to vote on proposed merers
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Chapter 08 - Stock Valuation
(. %oston ree Aress has a dividend polic) !hereb) the firm pa)s a constant annual dividend of =(.0 per share of common stock. he firm has 1,000 shares of stock outstandin. he compan) #. must al!a)s sho! a current liabilit) of =(,00, 9=(.0 × 1,000:, for dividends pa)able. %. must still declare each dividend before it becomes an actual compan) liabilit). C. is obliated to pa) =(.0 per share each )ear in perpetuit). &. !ill be declared in default if it does not pa) at least =(.0 per share per )ear on a timel) basis. '. has a liabilit) that must be paid at a later date should the compan) miss pa)in an annual dividend pa)ment.
+. Which one of the follo!in statements related to corporate dividends is correct" #. &ividends are nontaxable income to shareholders. %. &ividends reduce the taxable income of the corporation. C. he Chief 'xecutive ;fficer of a corporation is responsible for dec larin dividends. &. he Chief inancial ;fficer of a corporation determines the amount of dividend to be paid. '. Corporate shareholders ma) receive a tax break on a portion of their dividend income.
. Which one of these statements related to preferred stock is correct" #. Areferred shareholders normall) receive one vote per share of stock o!ned. %. Areferred shareholders determine the outcome of an) election that involves a prox) fiht. C. Areferred shareholders are considered to be the residual o!ners of a corporation. &. Areferred stock normall) has a stated li2uidatin value of =1,000 per share. '. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
. ou o!n one share of a cumulative preferred stock !hich pa)s 2uarterl) dividends. he firm has recentl) suffered some financial setbacks and has failed to pa ) the last t!o dividends. ?o!ever, ne! fundin has been arraned and the firm intends to restore all dividends, both common and preferred, this 2uarter. #s a preferred shareholder, )ou should expect to receive the e2uivalent of @@@@ 2uarter9s: of dividends !hen the next dividend is paid. #. 0 %. 1 C. ( &. + '. either 1, (, or +
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Chapter 08 - Stock Valuation
/. Which of the follo!in features do preferred shareholders and bondholders fre2uentl) have in common" <. lack of votin rihts <<. conversion option into common stock <<<. annuit) pa)ments
3. Which of the follo!in appl) to a specialist !ho trades on the floor of the 6S'" <. provides li2uidit) for an individual securit) <<. partiall) bein replaced b) Super&; <<<. pa)s an annual fee for a tradin license
8. Which one of the follo!in statements related to the 6S' is correct" #. Commission brokers !ork on behalf of brokerae firm clients. %. Shareholders of 6S' >roup,
5. Which one of the follo!in transactions occurs in the primar) market" #. purchase of 00 shares of >' stock from a current shareholder %. ift of 100 shares of stock to a charitable orani$ation C. ift of (00 shares of stock b) a mother to her dauhter &. a purchase of ne!l) issued stock from #I '. <%F*s purchase of >' stock
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Chapter 08 - Stock Valuation
0. Which one of the follo!in statements currentl) applies to a 6S' broker" #. o!ns a HseatH on the exchane %. bu)s at the bid price C. remains at his or her specified post &. matches customer bu) and sell orders '. trades for his or her personal account
1. Who o!ns the 6S'" #. 6S' members %. specialists C. dealers &. floor brokers '. shareholders
(. Which one of the follo!in pla)ers on the floor of the 6S' can be likened to part-time help because the) are called to dut) onl) !hen others are full) emplo)ed" #. floor trader %. specialist C. dealer &. floor broker '. commission broker
+. Which one of the follo!in statements applies to 6#S" #. a partner !ith the Gondon exchane %. exchane floor is located in Chicao C. sinle market maker for each listed securit) &. broker*s market '. comprised of three separate markets
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Chapter 08 - Stock Valuation
. ou o!n /00 shares of a 6#S listed stock that )ou !ish to sell. Which of the follo!in are options available to )ou for this purpose" <. sell the shares to a dealer at the dealer*s bid price <<. sell directl) to another individual via an 'C6 <<<. offer the shares )ourself on 6#S via an 'C6
. ou are the sole shareholder of a small corporation. Aresentl), )ou !ish to diversif) )our holdins and thus !ant to sell a portion of )our shares but do not !ant to incur the costs associated !ith S'C filins. Which one of the follo!in markets, if an), miht be conducive to this sale" #. 6#S %. ;C%% C. Aink Sheets &. 6S' '. 6one of the above
/. ou are an accountant and have been anal)$in the financial statements of 'uro Alace Farkets, !hich is a forein retailer. While the firm*s financials are not prepared accordin to >##A, )ou have still been able to understand the firm*s accountin practices and feel that this firm has a briht future. ;n !hich one of the follo!in 4.S. markets, if an), miht )ou be able to purchase shares in this firm" #. 6S' %. 6#S C. ;C%% &. Aink Sheets '. 6o 4.S. market !ill list this forein securit).
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Chapter 08 - Stock Valuation
3. Filler %rothers ?ard!are paid an annual dividend of =1.1 per share last month. oda), the compan) announced that future dividends !ill be increasin b) (./ percent annuall).
8. Sessler Fanufacturers made t!o announcements concernin its common stock toda). irst, the compan) announced that the next annual dividend !ill be =1.3 a share. Secondl), all dividends after that !ill decrease b) 1. percent annuall). What is the maximum amount )ou should pa) to purchase a share of this stock toda) if )ou re2uire a 1 percent rate of return" #. =11.(5 %. =1(./ C. =1+.(3 &. =1.00 '. =1.(1
5. ?o! much are )ou !illin to pa) for one share of Eumbo rout stock if the compan) Just paid a =0.30 annual dividend, the dividends increase b) 1./ percent annuall), and )ou re2uire a 10 percent rate of return" #. =8.(5 %. =8.++ C. =8.3 &. =8.+ '. =8.5
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Chapter 08 - Stock Valuation
/0. ree Fotion 'nterprises paid a =(.(0 per share annual dividend last !eek. &ividends are expected to increase b) +.3 percent annuall). What is one share of this stock !orth to )ou toda) if )our re2uired rate of return is 1 percent" #. =15.0/ %. =15.+0 C. =15./ &. =(0.(5 '. =(0.5
/1. 4pper Crust %akers Just paid an annual dividend of =(.80 a share and is expected to increase that amount b) percent per )ear.
/(. he common stock of extile Fills pa)s an annual dividend of =1./ a share. he compan) has promised to maintain a constant dividend even thouh economic times are touh. ?o! much are )ou !illin to pa) for one share of this stock if )ou !ant to earn a 1( percent annual return" #. =1+.3 %. =1.01 C. =1./ &. =1.35 '. =1.(+
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Chapter 08 - Stock Valuation
/+. Sho! %oat &inner heatres has paid annual dividends of =0.+(, =0.8, and =0./0 a share over the past three )ears, respectivel). he compan) no! predicts that it !ill maintain a constant dividend since its business has leveled off and sales are expected to remain relativel) flat. >iven the lack of future ro!th, )ou !ill onl) bu) this stock if )ou can earn at least a 1/ percent rate of return. What is the maximum amount )ou are !illin to pa) for one share of this stock toda)" #. =+.+ %. =+.3 C. =.+ &. =./5 '. =.8(
/. he common stock of #uto &eliveries sells for =(8.1/ a share. he stock is expected to pa) =1.+ per share next )ear !hen the annual dividend is distributed. he firm has established a pattern of increasin its dividends b) + percent annuall) and expects to continue doin so. What is the market rate of return on this stock" #. 3.( percent %. 3.35 percent C. 15./3 percent &. (0.1 percent '. (0.8/ percent
/. he current dividend )ield on Cla)ton*s Fetals common stock is (. percent. he compan) Just paid a =1.8 annual dividend and announced plans to pa) =1. next )ear. he dividend ro!th rate is expected to remain constant at the current level. What is the re2uired rate of return on this stock" #. /. percent %. /.8( percent C. 3.08 percent &. 3.+5 percent '. 3.3 percent
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Chapter 08 - Stock Valuation
//. 6orthern >as recentl) paid a =(.80 annual dividend on its common stock. his dividend increases at an averae rate of +.8 percent per )ear. he stock is currentl) sellin for =(/.51 a share. What is the market rate of return" #. 1+.88 percent %. 1.0+ percent C. 1.(1 percent &. 1.+3 percent '. 1./0 percent
/3. &enver Shoppes !ill pa) an annual dividend of =1./ a share next )ear !ith future dividends increasin b) .( percent annuall). What is the market rate of return if the stock is currentl) sellin for =+8.50 a share" #. /. percent %. 3.1+ percent C. 3./ percent &. 3.5 percent '. 8.(5 percent
/8. >reat Gakes ?ealth Care common stock offers an expected total return of 5.( percent. he last annual dividend !as =(.10 a share. &ividends increase at a constant (./ percent per )ear. What is the dividend )ield" #. +.3 percent %. .(0 percent C. . percent &. .( percent '. /./0 percent
/5. 'lectronics,
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Chapter 08 - Stock Valuation
30. Do)*s Weldin Supplies common stock sells for =+8 a share and pa)s an annual dividend that increases b) + percent annuall). he market rate of return on this stock is 8.(0 percent. What is the amount of the last dividend paid" #. =1.80 %. =1.8/ C. =1.5( &. =1.58 '. =(.10
31. &oulass >ardens pa)s an annual dividend that is expected to increase b) .1 percent per )ear. he stock commands a market rate of return of 1(./ percent and sells for =(.50 a share. What is the expected amount of the next dividend" #. =(.0+ %. =(.1( C. =+.13 &. =(.(0 '. =(.(8
3(. #tlas Fines has adopted a polic) of increasin the annual dividend on its common stock at a constant rate of (.3 percent annuall). he firm Just paid an annual dividend of =1./3. What !ill the dividend be six )ears from no!" #. =1.88 %. =1.5( C. =1.53 &. =(.0( '. =(.0
3+. # stock pa)s a constant annual dividend and sells for =/.10 a share.
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Chapter 08 - Stock Valuation
3. ou !ant to purchase some shares of >reen World stock but need a 1 percent rate of return to compensate for the perceived risk of such o!nership. What is the maximum )ou are !illin to spend per share to bu) this stock if the compan) pa)s a constant =0.50 annual dividend per share" #. =.0 %. =/.00 C. =/.50 &. =3.(0 '. =3.80
3. ?ome Cannin Aroducts common stock sells for =.5/ a share and has a market rate of return of 1(.8 percent. he compan) Just paid an annual dividend of =1.0 per share. What is the dividend ro!th rate" #. 8.(5 percent %. 8. percent C. 5.(+ percent &. 5./3 percent '. 10.( percent
3/. Winter ime #dventures is oin to pa) an annual dividend of =(.8/ a share on its common stock next )ear. his )ear, the compan) paid a dividend of =(.3 a share. he compan) adheres to a constant rate of ro!th dividend polic). What !ill one share of this common stock be !orth five )ears from no! if the applicable discount rate is 11.3 percent" #. =+. %. =+.83 C. =.1 &. =.15 '. =3.00
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Chapter 08 - Stock Valuation
33. ?ihto!er Aharmac) Just paid a =+.10 annual dividend. he compan) has a polic) of increasin the dividend b) +.8 percent annuall). ou !ould like to purchase 100 shares of stock in this firm but reali$e that )ou !ill not have the funds to do so for another four )ears.
38. 6ational Warehousin Just announced it is increasin its annual dividend to =1.18 next )ear and establishin a polic) !hereb) the dividend !ill increase b) +.( percent annuall) thereafter. ?o! much !ill one share of this stock be !orth 8 )ears from no! if the re2uired rate of return is 5. percent" #. =(.+8 %. =(./8 C. =(/.1 &. =(3.0( '. =(3.+3
35. Shares of ?ot &onuts common stock are currentl) sellin for =+(.+. he last annual dividend paid !as =1.10 per share and the market rate of return is 10.3 percent. #t !hat rate is the dividend ro!in" #. 3.0/ percent %. 8./3 percent C. 10.( percent &. 1(./0 percent '. 1.10 percent
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Chapter 08 - Stock Valuation
80. Combined Communications is a ne! firm in a rapidl) ro!in industr). he compan) is plannin on increasin its annual dividend b) 1 percent a )ear for the next )ears and then decreasin the ro!th rate to +. percent per )ear. he compan) Just paid its annual dividend in the amount of =0.(0 per share. What is the current value of one share of this stock if the re2uired rate of return is 1. percent" #. =1.8( %. =(.0 C. =(.5 &. =(.31 '. =+.0
81. KG #irlines paid an annual dividend of =1.( a share last month. he compan) is plannin on pa)in =1.0, =1.3, and =1.80 a share over the next + )ears, respectivel). #fter that, the dividend !ill be constant at =( per share per )ear. What is the market price of this stock if the market rate of return is 10. percent" #. =1.58 %. =1/.03 C. =18.( &. =(1.1/ '. =(.10
8(. Dene!
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Chapter 08 - Stock Valuation
8+. &iets or ou announced toda) that it !ill bein pa)in annual dividends next )ear. he first dividend !ill be =0.1( a share. he follo!in dividends !ill be =0.1, =0.(0, =0.0, and =0./0 a share annuall) for the follo!in )ears, respectivel). #fter that, dividends are proJected to increase b) percent per )ear. ?o! much are )ou !illin to pa) to bu) one share of this stock toda) if )our desired rate of return is 8. percent" #. =5./3 %. =5.5 C. =10.+8 &. =10.0 '. =10.8/
8. Cr)stal >lass recentl) paid =+./0 as an annual dividend. uture dividends are proJected at =+.80, =.10, and =.( over the next + )ears, respectivel). %einnin )ears from no!, the dividend is expected to increase b) +.( percent annuall). What is one share of this stock !orth to )ou if )ou re2uire a 1(. percent rate of return on similar investments" #. =(.5( %. =+.0 C. =.1( &. =.88 '. =/.0
8. Ganle) 'nterprises pa)s a constant dividend of =0./0 a share. he compan) announced toda) that it !ill continue to pa) the dividend for another ( )ears after !hich time all dividends !ill cease. What is one share of this stock !orth toda) if the re2uired rate of return is 1/. percent" #. =0.5( %. =0.5/ C. =1.0 &. =1.05 '. =1.(0
8-(
Chapter 08 - Stock Valuation
8/. ester)ear Aroductions pa)s no dividend at the present time. he compan) plans to start pa)in an annual dividend in the amount of =0.0 a share for t!o )ears commencin four )ears from toda). #fter that time, the compan) plans on pa)in a constant =0.3 a share annual dividend indefinitel). ?o! much are )ou !illin to pa) to bu ) a share of this stock toda) if )our re2uired return is 11./ percent" #. =+.38 %. =.(( C. =.+3 &. =.31 '. =.58
83. S!eatshirts 4nlimited is do!nsi$in. he compan) paid a =(.80 annual dividend last )ear. he compan) has announced plans to lo!er the dividend b) ( percent each )ear. ;nce the dividend amount becomes $ero, the compan) !ill cease all dividends and o out of business. ou have a re2uired rate of return of 1. percent on this particular stock iven the compan)*s situation. What are )our shares in this firm !orth toda) on a per share basis" #. =.15 %. =/.51 C. =8./8 &. =15.(5 '. =((.11
88. &exter Fetals, paid its first annual dividend )esterda) in the amount of =0.18 a share. he compan) plans to double each annual dividend pa)ment for the next + )ears. #fter that time, it plans to pa) =1.( a share for ( )ears than then pa) a constant dividend of =1./0 per share indefinitel). What is one share of this stock !orth toda) if the market rate of return on similar securities is 10.( percent" #. =1(.+( %. =1(.33 C. =1+.(0 &. =1.(/ '. =1.35
8-(
Chapter 08 - Stock Valuation
85. Farshall #rts Studios Just paid an annual dividend of =1.+/ a share. he firm plans to pa) annual dividends of =1.0, =1./, and =1.8 over the next + )ears, respectivel). #fter that time, the dividends !ill be held constant at =1./0 per share. What is this stock !orth toda) at a 5 percent discount rate" #. =1.08 %. =1.+0 C. =1/./3 &. =1/.35 '. =13./
50. ?ome Care Aroviders is pa)in an annual dividend of =1.10 ever) other )ear. he last dividend !as paid t!o )ears ao. he firm !ill continue this polic) until + more dividend pa)ments have been paid. ;ne )ear after the last dividend normal pa)ment, the compan) plans to pa) a final li2uidatin dividend of =0 per share. What is the current market value of this stock if the re2uired return is 13 percent" #. =18.5( %. =(0.3 C. =(+.1/ &. =(.1 '. =(.+
51. Gast )ear, ?ansen &eliver) paid an annual dividend of =+.(0 per share. he compan) has been reducin the dividends b) 10 percent annuall). ?o! much are )ou !illin to pa) to purchase stock in this compan) if )our re2uired rate of return is 11. percent" #. =1.5( %. =3.83 C. =1+.0 &. =(1.1/ '. =(.08
8-(/
Chapter 08 - Stock Valuation
5(. %eatrice Farkets is expectin a period of intense ro!th and has decided to retain more of its earnins to help finance that ro!th. #s a result, it is oin to reduce its annual dividend b) +0 percent a )ear for the next ( )ears. #fter that, it !ill maintain a constant dividend of =(.0 a share. Gast )ear, the compan) paid =+./0 as the annual dividend per share. What is the market value of this stock if the re2uired rate of return is 1. percent" #. =1./+ %. =1/.30 C. =18.08 &. =15./1 '. =(1.(+
5+. %onnie*s
5. EIE oods !ants to issue some 3 percent preferred stock that has a stated li2uidatin value of =100 a share. he compan) has determined that stocks !ith similar characteristics provide a 1(.8 percent rate of return. What should the offer price be" #. =+3.(/ %. =1.+8 C. =8.(0 &. =./5 '. =/(./0
8-(3
Chapter 08 - Stock Valuation
5. he preferred stock of Dail Gines,
5/. Farie o!ns shares of &eltona Aroductions preferred stock !hich she sa)s provides her !ith a constant 1.+ percent rate of return. he stock is currentl) priced at =. a share. What is the amount of the dividend per share" #. =/.00 %. =/.( C. =/.0 &. =/./0 '. =3.00
53. L)lo,
Essay Questions
58. What are the primar) differences and similarities bet!een 6#S and the 6S'"
8-(8
Chapter 08 - Stock Valuation
55. 4sin the dividend ro!th model, explain !h) a firm !ould be hesitant to reduce the ro!th rate of its dividends.
100. Kelle) !ants to purchase shares in Classic Kars,
101. 'xplain !h) small shareholders should prefer cumulative votin over straiht votin.
10(. ed, a !ealth) individual, plans to purchase +0 percent of a firm*s Class # shares of outstandin stock. ?e believes that such a purchase !ill allo! him to control the firm b) electin his candidates to the board over time as current board member*s terms expire. he firm has a cumulative votin process. What factors should ed be considerin and !h) to ensure he can ain the control he desires"
8-(5
Chapter 08 - Stock Valuation
10+. 'xplain the primar) chane that occurred in the structure of the 6S' in (00/ and ho! that chane affected the exchane members.
Multiple Choice Questions
10. Eefferson Fills Just paid a dividend of =1./ per share on its stock. he dividends are expected to ro! at a constant rate of 8 percent per )ear, indefinitel). What !ill the price of this stock be in 3 )ears if investors re2uire a 1 percent rate of return" #. =(8.18 %. =+(.0 C. =+3./ &. =1.( '. =+.++
10. he next dividend pa)ment b) ?illside Farkets !ill be =(.+ per share. he dividends are anticipated to maintain a . percent ro!th rate forever. he stock currentl) sells for =30 per share. What is the dividend )ield" #. +.(0 percent %. +.+/ percent C. +. percent &. .0 percent '. .81 percent
8-+0
Chapter 08 - Stock Valuation
10/. he Stiller Corporation !ill pa) a =+.80 per share dividend next )ear. he compan) pledes to increase its dividend b) (. percent indefinitel). ?o! much are )ou !illin to pa) to purchase this compan)*s stock toda) if )ou re2uire a /.5 percent return on )our investment" #. =.03 %. =/+.05 C. =3(.(( &. =38.3 '. =8.
103. Suppose )ou kno! a compan)*s stock currentl) sells for =50 per share and the re2uired return on the stock is 10 percent. ou also kno! that the total return on the stock is evenl) divided bet!een a capital ains )ield and a dividend )ield. What is the current dividend if it*s the compan)*s polic) to al!a)s maintain a constant ro!th rate in its dividends" #. =.18 %. =.(5 C. =.+3 &. =.0 '. =./
108. Whistle Stop rains pa)s a constant =1/ dividend on its stock. he compan) !ill maintain this dividend for the next 1 )ears and !ill then cease pa)in dividends forever. What is the current price per share if the re2uired return on this stock is 1 percent" #. =33.38 %. =8(.8 C. =51.5 &. =10/./3 '. =11(.00
105. Forristo!n
8-+1
Chapter 08 - Stock Valuation
110. he armer*s Farket Just paid an annual dividend of = on its stock. he ro!th rate in dividends is expected to be a constant percent per )ear indefinitel).
111. Sprinboro ech is a )oun start-up compan). 6o dividends !ill be paid on the stock over the next 1 )ears, because the firm needs to plo! back its earnins to fuel ro!th. he compan) !ill pa) a =1( per share dividend in 1/ )ears and !ill increase the dividend b) + percent per )ear thereafter. What is the current share price if the re2uired return on this stock is 8 percent" #. =3.// %. =88.15 C. =1(0.00 &. =1/.5 '. =(0.00
11(. >allo!a),
8-+(
Chapter 08 - Stock Valuation
11+. Een*s ashions is ro!in 2uickl). &ividends are expected to ro! at a (( percent rate for the next + )ears, !ith the ro!th rate fallin off to a constant 8 percent thereafter. he re2uired return is 1( percent and the compan) Just paid a =+.80 annual dividend. What is the current share price" #. =1(8.5/ %. =1+1.11 C. =1/.13 &. =18.83 '. =1(.(0
11. ?ard!oods,
11. %echtel Fachiner) stock currentl) sells for =0 per share. he market re2uires a 1 percent return on the firm*s stock. he compan) maintains a constant 8 percent ro!th rate in dividends. What !as the most recent annual dividend per share paid on this stock" #. =+.00 %. =+.( C. =+.0 &. =+./3 '. =+.51
11/. Southern 4tilities Just issued some ne! preferred stock. he issue !ill pa) a =15 annual dividend in perpetuit) beinnin 5 )ears from no!. What is one share of this stock !orth toda) if the market re2uires a 3 percent return on this investment" #. =13.53 %. =1/.1/ C. =185.08 &. =(1.1 '. =(31.+
8-++
Chapter 08 - Stock Valuation
113. %i alls ours Just paid a dividend of =1. per share. he dividends are expected to ro! at +0 percent for the next 8 )ears and then level off to a 3 percent ro!th rate indefinitel). What is the price of this stock toda) iven a re2uired return of 1 percent" #. =/3. %. =/5.50 C. =3(.3 &. =33./3 '. =38.15
118. ?arve) Count) Choppers,
115. Westover Winds Just paid a dividend of =(.0 per share. he compan) !ill increase its dividend b) 8 percent next )ear and !ill then reduce its dividend ro!th rate b) ( percentae points per )ear until it reaches the industr) averae of ( percent dividend ro!th, after !hich the compan) !ill keep a constant ro!th rate forever. What is the price of this stock toda) iven a re2uired return of 1( percent" #. =(8.( %. =(8.55 C. =+1.8+ &. =+(.0/ '. =+(.3
8-+
Chapter 08 - Stock Valuation
Chapter 08 Stock Valuation #ns!er Ke)
Multiple Choice Questions
1. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend ro!th rate, and the applicable discount rate" #. $ero ro!th B. dividend ro!th C. capital pricin &. earnins capitali$ation '. discounted dividend Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
(. Which one of the follo!in is computed b) dividin next )ear*s annual dividend b) the current stock price" #. )ield to maturit) %. total )ield C. dividend )ield &. capital ains )ield '. ro!th rate Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# yiel#
8-+
Chapter 08 - Stock Valuation
+. Which one of follo!in is the rate at !hich a stock*s price is expected to appreciate" #. current )ield %. total return C. dividend )ield D. capital ains )ield '. coupon rate Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Ca"ital gains y iel#
. Which one of the follo!in t)pes of stock is defined b) the fact that it receives no preferential treatment in respect to either dividends or bankruptc) proceedins" #. dual class %. cumulative C. non-cumulative &. preferred E. common Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 8' !o"ic: Co&&on stoc(
8-+/
Chapter 08 - Stock Valuation
. # compan) has t!o open seats, Seat # and Seat %, on its board of directors. here are / candidates v)in for these ( positions. here !ill be a sinle election to determine the !inner of both open seats. #s the o!ner of 100 shares of stock, )ou !ill receive one vote per share for each open seat. ou decide to cast all (00 of )our votes for a sinle candidate. What is this t)pe of votin called" #. democratic B. cumulative C. straiht &. deferred '. prox) Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Cu&ulative voting
/. ou !ant to be on the board of directors of Wisel) oods. Since )ou are the onl) shareholder that !ill vote for )ou, )ou !ill need to o!n more than half of the outstandin shares of stock if )ou are to be elected to the board. What is the t)pe of votin called that re2uires this level of stock o!nership to be successfull) elected under these conditions" #. democratic %. cumulative C. straiht &. deferred '. prox) Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Straig%t voting
8-+3
Chapter 08 - Stock Valuation
3. ou cannot attend the shareholder*s meetin for #lpha 4nited so )ou authori$e another shareholder to vote on )our behalf. What is the rantin of this authorit) called" #. alterin %. cumulative votin C. straiht votin &. indenture areement E. votin b) prox) Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: )ro*y
8. What are the distributions to shareholders b) a corporation called" #. retained earnins %. net income C. dividends &. capital pa)ments '. diluted profits Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 8' !o"ic: Divi#en#s
8-+8
Chapter 08 - Stock Valuation
5. Which one of the follo!in is a t)pe of e2uit) securit) that has a fixed dividend and a priorit) status over other e2uit) securities" #. senior bond %. debenture C. !arrant &. common stock E. preferred stock Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 8' !o"ic: )referre# stoc(
10. Callander 'nterprises stock is listed on 6#S. he firm is plannin to issue some n e! e2uit) shares for sale to the eneral public. his sale !ill occur in !hich one of the follo!in markets" #. private %. auction C. exchane floor &. secondar) E. primar) Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: )ri&ary &ar(et
8-+5
Chapter 08 - Stock Valuation
11. he secondar) market is best defined b) !hich one of the follo!in" #. market in !hich subordinated shares are issued and resold %. market conducted solel) b) brokers C. market dominated b) dealers D. market !here outstandin shares of stock are resold '. market !here !arrants are offered and sold Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Secon#ary &ar(et
1(. #n aent !ho maintains an inventor) from !hich he or she bu)s and sells securities is called a #. broker. %. trader. C. capitalist. &. principal. E. dealer. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Dealer
8-0
Chapter 08 - Stock Valuation
1+. #n aent !ho arranes a transaction bet!een a bu)er and a seller of e2uit) securities is called a A. broker. %. floor trader. C. capitalist. &. principal. '. dealer. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Bro(er
1. he o!ner of one of the 1,+// tradin licenses for the 6S' is called a #. broker. B. member. C. aent. &. specialist. '. dealer. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: ,e&ber
8-1
Chapter 08 - Stock Valuation
1. he person on the floor of the 6S' !ho executes bu) and sell orders on behalf of customers is called a9n: #. floor trader. %. dealer. C. specialist. &. executor. E. commission broker. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Co&&ission bro(er
1/. # market maker !ho acts as a dealer in one or more securities on the floor of the 6S' is called a #. floor trader. %. floor post. C. specialist. &. floor broker. '. commission broker. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: S"ecialist
8-(
Chapter 08 - Stock Valuation
13. # floor broker on the 6S' does !hich one of the follo!in" #. supervises the commission brokers for a financial firm %. trades for his or her personal inventor) C. executes orders on behalf of a commission broker &. maintains an inventor) and takes the role of a specialist '. is chared !ith maintainin a li2uid, orderl) market Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: loor bro(er
18. #n individual on the floor of the 6S' !ho o!ns a tradin license and bu)s and sells for his or her personal account is called a A. floor trader. %. exchane customer. C. specialist. &. floor broker. '. market maker. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: loor tra#er
8-+
Chapter 08 - Stock Valuation
15. Which one of the follo!in is the electronic s)stem used b) the 6S' for directl) transmittin orders to specialists" #. ;C&; B. Super&; C.
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Su"erDO!
(0. he stream of customer orders comin in to the 6S' tradin floor is called the #. paper trail. %. tradin volume. C. order flo!. &. bid-ask spread. '. commission trail. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Or#er flo$
8-
Chapter 08 - Stock Valuation
(1. he counter area on the floor of the 6S' !here a specialist operates is called a #. pit. %. hot spot. C. seat. D. post. '. &;. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: S"ecialist.s "ost
((. # securities market primaril) comprised of dealers !ho bu) and sell for their o!n inventories is referred to !hich t)pe of market" #. auction %. private C. over-the-counter &. reional '. electronic net!ork Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: Over-t%e-counter &ar(et
8-
Chapter 08 - Stock Valuation
(+. #n 'C6 is best described as #. an electronic net!ork !hich transmits orders directl) to the floor of the 6S'. %. the net!ork used in the primar) market for sellin ne!l) issued shares. C. the international tradin net!ork of the 6S'. D. a !ebsite that allo!s individual investors to trade directl) !ith one another. '. a computeri$ed net!ork used b) independent brokers. Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: lectronic co&&unications net$or(
(. 6ational ruckin has paid an annual dividend of =1.00 per share on its common stock for the past fifteen )ears and is expected to continue pa)in a dollar a share lon into the future. >iven this, one share of the firm*s stock is #. basicall) !orthless as it offers no ro!th potential. %. e2ual in value to the present value of =1 paid one )ear from toda). C. priced the same as a =1 perpetuit). &. valued at an assumed ro!th rate of one percent. '. !orth =1 a share in the current market. Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: )er"etuity
8-/
Chapter 08 - Stock Valuation
(. #n increase in !hich of the follo!in !ill increase the current value of a stock accordin to the dividend ro!th model" <. dividend amount <<. number of future dividends, provided the current number is less than infinite <<<. discount rate
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
(/. ?ih Countr) %uilders currentl) pa)s an annual dividend of =1.+ and plans on increasin that amount b) (. percent each )ear. Valle) ?ih %uilders currentl) pa)s an annual dividend of =1.(0 and plans on increasin its dividend b) + percent annuall). >iven this information, )ou kno! for certain that the stock of ?ih Countr) %uilders* has a hiher @@@@@@ than the stock of Valle) ?ih %uilders. #. market price %. dividend )ield C. capital ains )ield &. total return '. he ans!er cannot be determined based on the information provided. Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Ca"ital gains y iel#
8-3
Chapter 08 - Stock Valuation
(3. he dividend ro!th model <. assumes that dividends increase at a constant rate forever. <<. can be used to compute a stock price at an) point in time. <<<. can be used to value $ero-ro!th stocks.
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
(8. Which one of the follo!in is an underl)in assumption of the dividend ro!th model" #. # stock has the same value to ever) investor. B. # stock*s value is e2ual to the discounted present value of the future cash flo!s !hich it enerates. C. # stock*s value chanes in direct relation to the re2uired return. &. Stocks that pa) the same annual dividend have e2ual market values. '. he dividend ro!th rate is inversel) related to a stock*s market price. Defer to section 8.1
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
8-8
Chapter 08 - Stock Valuation
(5. #ns!er this 2uestion based on the dividend ro!th model.
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
+0. Which one of the follo!in statements is correct concernin the t!o-stae dividend ro!th model" #. >1 cannot be neative. %. At B &tD. C. >1 must be reater than > (. D. >1 can be reater than D. '. D must be less than >1 but reater than >(. Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !$o-stage gro$t%
8-5
Chapter 08 - Stock Valuation
+1. Which one of the follo!in statements is correct" A. he capital ains )ield is the annual rate of chane in a stock*s price. %. Areferred stocks have constant ro!th dividends. C. # constant dividend stock cannot be valued usin the dividend ro!th model. &. he dividend ro!th model can be used to compute the current value of an) stock. '. #n increase in the re2uired return !ill decrease the capital ains )ield. Defer to sections 8.1 and 8.(
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 an# 8' !o"ic: Stoc( features
+(. Supernormal ro!th is a ro!th rate that #. is both positive and follo!s a )ear or more of neative ro!th. %. exceeds a firm*s previous )ear*s rate of ro!th. C. is enerall) constant for an infinite period of time. D. is unsustainable over the lon term. '. applies to a sinle, abnormal )ear. Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Su"ernor&al gro$t%
8-0
Chapter 08 - Stock Valuation
++. Which one of the follo!in represents the capital ains )ield as used in the dividend ro!th model" #. &1 %. &1A0 C. A0 D. '. A0 Defer to section 8.1
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Ca"ital gains y iel#
+. Winston Co. has a dividend-pa)in stock !ith a total return for the )ear of -/. percent. Which one of the follo!in must be true" #. he dividend must be constant. B. he stock has a neative capital ains )ield. C. he dividend )ield must be $ero. &. he re2uired rate of return for this stock increased over the )ear. '. he firm is experiencin supernormal ro!th. Defer to section 8.1
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: !otal return
8-1
Chapter 08 - Stock Valuation
+. he t!o-stae dividend ro!th model evaluates the current price of a stock based on the assumption a stock !ill #. pa) an increasin dividend for a period of time and then cease pa)in dividends altoether. %. increase the dividend amount ever) other )ear. C. pa) a constant dividend for the first t!o 2uarters of each )ear and then increase the dividend the last t!o 2uarters of each )ear. D. ro! at a fixed rate for a period of time after !hich it !ill ro! at a different rate indefinitel). '. pa) increasin dividends for a fixed period of time, cease pa)in dividends for a period of time, and then commence pa)in increasin dividends for an indefinite period of time. Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !$o-stage #ivi#en# gro$t%
+/. Which one of the follo!in sets of dividend pa)ments best meets the definition of t!ostae ro!th as it applies to the t!o-stae dividend ro!th model" #. no dividends for )ears, then increasin dividends forever %. =1 per share annual dividend for ( )ears, then =1.( annual dividends forever C. decreasin dividends for / )ears follo!ed b) one final li2uidatin dividend pa)ment &. dividends pa)ments !hich increase b) (, +, and percent respectivel) for + )ears follo!ed b) a constant dividend thereafter E. dividend pa)ments !hich increase b) 10 percent per )ear for )ears follo!ed b) dividends !hich increase b) + percent annuall) thereafter Defer to section 8.1
AACSB: N/A Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !$o-stage #ivi#en# gro$t%
8-(
Chapter 08 - Stock Valuation
+3. Which one of the follo!in rihts is never directl) ranted to all shareholders of a publicl)-held corporation" #. electin the board of directors %. receivin a distribution of compan) profits C. votin either for or aainst a proposed merer or ac2uisition D. determinin the amount of the dividend to be paid per share '. havin first chance to purchase an) ne! e2uit) shares that ma) be offered Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: S%are%ol#er rig%ts
+8. Een o!ns +0 shares of stock in &elta ashions and !ants to !in a seat on the board of directors. he firm has a total of 100 shares of stock outstandin. 'ach share receives one vote. Aresentl), the compan) is votin to elect three ne! directors. Which one of the follo!in statements must be true iven this information" #. Deardless of the votin procedure, Een does not o!n enouh shares to ain a seat on the board. %.
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: oting
8-+
Chapter 08 - Stock Valuation
+5. he %lue Farlin is o!ned b) a roup of shareholders !ho all vote independentl) and !ho all !ant personal control over the firm. What is the minimum percentae of the outstandin shares one of these shareholders must o!n if he or she is to ain personal control over this firm iven that the firm uses straiht votin" #. 13 percent %. (0 percent plus one vote C. ( percent plus one vote D. 0 percent plus one vote '. 1 percent Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Straig%t voting
0. Chemical Fines has ,000 shareholders and is preparin to elect t!o ne! board members. ou do not o!n enouh shares to personall) control the elections but are determined to oust the current leadership. Gike!ise, no other sinle shareholder o!ns sufficient shares to personall) control the outcome of the election. Which one of the follo!in is the most likel) outcome of this situation iven that some shareholders are happ) !ith the existin manaement" #. neotiated settlement !here each side is ranted control over one of the open seats %. protracted leal battle over control of the board of directors C. arbitrated settlement !here the arbitrator determines !ho !ill be elected to the board &. control of the board decided !ithout )our influence E. prox) fiht for control of the board Defer to section 8.(
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-' Section: 8' !o"ic: )ro*y voting
8-
Chapter 08 - Stock Valuation
1. ?ard) Gumber has a capital structure !hich includes bonds, preferred stock, and common stock. Which of the follo!in rihts have most likel) been ranted to the preferred shareholders" <. riht to share in compan) profits prior to other shareholders <<. riht to elect the corporate directors <<<. riht to vote on proposed merers
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: ) referre# s%are%ol#er rig%ts
(. %oston ree Aress has a dividend polic) !hereb) the firm pa)s a constant annual dividend of =(.0 per share of common stock. he firm has 1,000 shares of stock outstandin. he compan) #. must al!a)s sho! a current liabilit) of =(,00, 9=(.0 × 1,000:, for dividends pa)able. B. must still declare each dividend before it becomes an actual compan) liabilit). C. is obliated to pa) =(.0 per share each )ear in perpetuit). &. !ill be declared in default if it does not pa) at least =(.0 per share per )ear on a timel) basis. '. has a liabilit) that must be paid at a later date should the compan) miss pa)in an annual dividend pa)ment. Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Divi#en#s
8-
Chapter 08 - Stock Valuation
+. Which one of the follo!in statements related to corporate dividends is correct" #. &ividends are nontaxable income to shareholders. %. &ividends reduce the taxable income of the corporation. C. he Chief 'xecutive ;fficer of a corporation is responsible for dec larin dividends. &. he Chief inancial ;fficer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders ma) receive a tax break on a portion of their dividend income. Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Divi#en# features
. Which one of these statements related to preferred stock is correct" #. Areferred shareholders normall) receive one vote per share of stock o!ned. %. Areferred shareholders determine the outcome of an) election that involves a prox) fiht. C. Areferred shareholders are considered to be the residual o!ners of a corporation. &. Areferred stock normall) has a stated li2uidatin value of =1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares. Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: )referre# stoc(
8-/
Chapter 08 - Stock Valuation
. ou o!n one share of a cumulative preferred stock !hich pa)s 2uarterl) dividends. he firm has recentl) suffered some financial setbacks and has failed to pa ) the last t!o dividends. ?o!ever, ne! fundin has been arraned and the firm intends to restore all dividends, both common and preferred, this 2uarter. #s a preferred shareholder, )ou should expect to receive the e2uivalent of @@@@ 2uarter9s: of dividends !hen the next dividend is paid. #. 0 %. 1 C. ( D. + '. either 1, (, or + Defer to section 8.(
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: Cu&ulative "referre# stoc(
/. Which of the follo!in features do preferred shareholders and bondholders fre2uentl) have in common" <. lack of votin rihts <<. conversion option into common stock <<<. annuit) pa)ments
AACSB: N/A Difficulty: Basic Learning Objective: 8-' Section: 8' !o"ic: )referre# stoc( an# #ebt
8-3
Chapter 08 - Stock Valuation
3. Which of the follo!in appl) to a specialist !ho trades on the floor of the 6S'" <. provides li2uidit) for an individual securit) <<. partiall) bein replaced b) Super&; <<<. pa)s an annual fee for a tradin license
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: S"ecialist
8. Which one of the follo!in statements related to the 6S' is correct" A. Commission brokers !ork on behalf of brokerae firm clients. %. Shareholders of 6S' >roup,
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: N2S
8-8
Chapter 08 - Stock Valuation
5. Which one of the follo!in transactions occurs in the primar) market" #. purchase of 00 shares of >' stock from a current shareholder %. ift of 100 shares of stock to a charitable orani$ation C. ift of (00 shares of stock b) a mother to her dauhter D. a purchase of ne!l) issued stock from #I '. <%F*s purchase of >' stock Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: )ri&ary &ar(et
0. Which one of the follo!in statements currentl) applies to a 6S' broker" #. o!ns a HseatH on the exchane %. bu)s at the bid price C. remains at his or her specified post D. matches customer bu) and sell orders '. trades for his or her personal account Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: N2S bro(er
8-5
Chapter 08 - Stock Valuation
1. Who o!ns the 6S'" #. 6S' members %. specialists C. dealers &. floor brokers E. shareholders Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: N2S o$ners%i"
(. Which one of the follo!in pla)ers on the floor of the 6S' can be likened to part-time help because the) are called to dut) onl) !hen others are full) emplo)ed" #. floor trader %. specialist C. dealer D. floor broker '. commission broker Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: loor bro(er
8-/0
Chapter 08 - Stock Valuation
+. Which one of the follo!in statements applies to 6#S" #. a partner !ith the Gondon exchane %. exchane floor is located in Chicao C. sinle market maker for each listed securit) &. broker*s market E. comprised of three separate markets Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: NASDA3
. ou o!n /00 shares of a 6#S listed stock that )ou !ish to sell. Which of the follo!in are options available to )ou for this purpose" <. sell the shares to a dealer at the dealer*s bid price <<. sell directl) to another individual via an 'C6 <<<. offer the shares )ourself on 6#S via an 'C6
AACSB: N/A Difficulty: 0nter&e#iate Learning Objective: 8-+ Section: 8+ !o"ic: NASDA3 an# CNs
8-/1
Chapter 08 - Stock Valuation
. ou are the sole shareholder of a small corporation. Aresentl), )ou !ish to diversif) )our holdins and thus !ant to sell a portion of )our shares but do not !ant to incur the costs associated !ith S'C filins. Which one of the follo!in markets, if an), miht be conducive to this sale" #. 6#S %. ;C%% C. Aink Sheets &. 6S' '. 6one of the above Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: )in( S%eets
/. ou are an accountant and have been anal)$in the financial statements of 'uro Alace Farkets, !hich is a forein retailer. While the firm*s financials are not prepared accordin to >##A, )ou have still been able to understand the firm*s accountin practices and feel that this firm has a briht future. ;n !hich one of the follo!in 4.S. markets, if an), miht )ou be able to purchase shares in this firm" #. 6S' %. 6#S C. ;C%% D. Aink Sheets '. 6o 4.S. market !ill list this forein securit). Defer to section 8.+
AACSB: N/A Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: )in( S%eets
8-/(
Chapter 08 - Stock Valuation
3. Filler %rothers ?ard!are paid an annual dividend of =1.1 per share last month. oda), the compan) announced that future dividends !ill be increasin b) (./ percent annuall).
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
8. Sessler Fanufacturers made t!o announcements concernin conce rnin its common stock toda). irst, the compan) announced that the next annual dividend !ill be =1.3 a share. Secondl), all dividends after that !ill decrease b) 1. percent annuall). What is the maximum amount )ou should pa) to purchase a share of this stock toda) if )ou re2uire a 1 percent rate of return" A. =11.(5 %. =1(./ %. =1(./ C. =1+.(3 C. =1+.(3 &. =1.00 &. =1.00 '. =1.(1 '. =1.(1
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Negative gro$t%
8-/+
Chapter 08 - Stock Valuation
5. ?o! much are )ou !illin to pa) for one share of Eumbo rout stock if the compan) Just paid a =0.30 annual dividend, the dividends increase b) 1./ percent annuall), and )ou re2uire a 10 percent rate of return" #. =8.(5 #. =8.(5 %. =8.++ %. =8.++ C. =8.3 &. =8.+ &. =8.+ '. =8.5 '. =8.5
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
/0. ree Fotion 'nterprises paid a =(.(0 =(.( 0 per share annual dividend last !eek. &ividends are expected to increase b) +.3 + .3 percent annuall). What is one share of this stock !orth to )ou toda) if )our re2uired rate of return is 1 percent" #. =15.0/ #. =15.0/ %. =15.+0 %. =15.+0 C. =15./ C. =15./ D. =(0.(5 '. =(0.5 '. =(0.5
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
8-/
Chapter 08 - Stock Valuation
/1. 4pper Crust %akers Just paid an annual dividend of =(.80 a share and is expected to increase that amount b) percent p ercent per )ear.
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
/(. he common stock of o f extile extile Fills pa)s an annual dividend of =1./ a share. he compan) has promised to maintain a constant dividend even thouh economic times are touh. ?o! much are )ou !illin to pa) for one share of this stock if )ou !ant to earn a 1( 1( percent annual return" A. =1+.3 %. =1.01 %. =1.01 C. =1./ C. =1./ &. =1.35 &. =1.35 '. =1.(+ '. =1.(+
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Constant #ivi#en#
8-/
Chapter 08 - Stock Valuation
/+. Sho! %oat &inner heatres has paid annual dividends of =0.+(, =0.8, and =0./0 a share over the past three )ears, respectivel). he compan) no! predicts that it !ill maintain a constant dividend since its business has leveled off and sales are expected to remain relativel) flat. >iven the lack of future ro!th, )ou !ill onl) bu) this stock if )ou can earn at least a 1/ percent rate of return. What is the maximum amount )ou are !illin to pa) for one share of this stock toda)" #. =+.+ B. =+.3 C. =.+ &. =./5 '. =.8(
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Constant #ivi#en#
/. he common stock of #uto &eliveries sells for =(8.1/ a share. he stock is expected to pa) =1.+ per share next )ear !hen the annual dividend is distributed. he firm has established a pattern of increasin its dividends b) + percent annuall) and expects to continue doin so. What is the market rate of return on this stock" #. 3.( percent B. 3.35 percent C. 15./3 percent &. (0.1 percent '. (0.8/ percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: 4e5uire# return
8-//
Chapter 08 - Stock Valuation
/. he current dividend )ield on Cla)ton*s Fetals common stock is (. percent. he compan) Just paid a =1.8 annual dividend and announced plans to pa) =1. next )ear. he dividend ro!th rate is expected to remain constant at the current level. What is the re2uired rate of return on this stock" A. /. percent %. /.8( percent C. 3.08 percent &. 3.+5 percent '. 3.3 percent
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: 4e5uire# return
//. 6orthern >as recentl) paid a =(.80 annual dividend on its common stock. his dividend increases at an averae rate of +.8 percent per )ear. he stock is currentl) sellin for =(/.51 a share. What is the market rate of return" #. 1+.88 percent %. 1.0+ percent C. 1.(1 percent &. 1.+3 percent E. 1./0 percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: 4e5uire# return
8-/3
Chapter 08 - Stock Valuation
/3. &enver Shoppes !ill pa) an annual dividend of =1./ a share next )ear !ith future dividends increasin b) .( percent annuall). What is the market rate of return if the stock is currentl) sellin for =+8.50 a share" #. /. percent %. 3.1+ percent C. 3./ percent D. 3.5 percent '. 8.(5 percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: 4e5uire# return
/8. >reat Gakes ?ealth Care common stock offers an expected total return of 5.( percent. he last annual dividend !as =(.10 a share. &ividends increase at a constant (./ percent per )ear. What is the dividend )ield" #. +.3 percent %. .(0 percent C. . percent &. .( percent E. /./0 percent &ividend )ield B 0.05( - 0.0(/ B /./ percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# yiel#
8-/8
Chapter 08 - Stock Valuation
/5. 'lectronics,
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: 6ro$t% rate
30. Do)*s Weldin Supplies common stock sells for =+8 a share and pa)s an annual dividend that increases b) + percent annuall). he market rate of return on this stock is 8.(0 percent. What is the amount of the last dividend paid" #. =1.80 %. =1.8/ C. =1.5( &. =1.58 '. =(.10
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# a&ount
8-/5
Chapter 08 - Stock Valuation
31. &oulass >ardens pa)s an annual dividend that is expected to increase b) .1 percent per )ear. he stock commands a market rate of return of 1(./ percent and sells for =(.50 a share. What is the expected amount of the next dividend" #. =(.0+ B. =(.1( C. =+.13 &. =(.(0 '. =(.(8
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# a&ount
3(. #tlas Fines has adopted a polic) of increasin the annual dividend on its common stock at a constant rate of (.3 percent annuall). he firm Just paid an annual dividend of =1./3. What !ill the dividend be six )ears from no!" #. =1.88 %. =1.5( C. =1.53 &. =(.0( '. =(.0 &/ B =1./3 × 91.0(3:/ B =1.53
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# a&ount
8-30
Chapter 08 - Stock Valuation
3+. # stock pa)s a constant annual dividend and sells for =/.10 a share.
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# a&ount
3. ou !ant to purchase some shares of >reen World stock but need a 1 percent rate of return to compensate for the perceived risk of such o!nership. What is the maximum )ou are !illin to spend per share to bu) this stock if the compan) pa)s a constant =0.50 annual dividend per share" #. =.0 B. =/.00 C. =/.50 &. =3.(0 '. =3.80
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Constant #ivi#en#
8-31
Chapter 08 - Stock Valuation
3. ?ome Cannin Aroducts common stock sells for =.5/ a share and has a market rate of return of 1(.8 percent. he compan) Just paid an annual dividend of =1.0 per share. What is the dividend ro!th rate" #. 8.(5 percent %. 8. percent C. 5.(+ percent &. 5./3 percent E. 10.( percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% rate
3/. Winter ime #dventures is oin to pa) an annual dividend of =(.8/ a share on its common stock next )ear. his )ear, the compan) paid a dividend of =(.3 a share. he compan) adheres to a constant rate of ro!th dividend polic). What !ill one share of this common stock be !orth five )ears from no! if the applicable discount rate is 11.3 percent" #. =+. %. =+.83 C. =.1 D. =.15 '. =3.00
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: uture stoc( "rice
8-3(
Chapter 08 - Stock Valuation
33. ?ihto!er Aharmac) Just paid a =+.10 annual dividend. he compan) has a polic) of increasin the dividend b) +.8 percent annuall). ou !ould like to purchase 100 shares of stock in this firm but reali$e that )ou !ill not have the funds to do so for another four )ears.
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: uture stoc( "rice
38. 6ational Warehousin Just announced it is increasin its annual dividend to =1.18 next )ear and establishin a polic) !hereb) the dividend !ill increase b) +.( percent annuall) thereafter. ?o! much !ill one share of this stock be !orth 8 )ears from no! if the re2uired rate of return is 5. percent" A. =(.+8 %. =(./8 C. =(/.1 &. =(3.0( '. =(3.+3
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: uture stoc( "rice
8-3+
Chapter 08 - Stock Valuation
35. Shares of ?ot &onuts common stock are currentl) sellin for =+(.+. he last annual dividend paid !as =1.10 per share and the market rate of return is 10.3 percent. #t !hat rate is the dividend ro!in" A. 3.0/ percent %. 8./3 percent C. 10.( percent &. 1(./0 percent '. 1.10 percent
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% rate
80. Combined Communications is a ne! firm in a rapidl) ro!in industr). he compan) is plannin on increasin its annual dividend b) 1 percent a )ear for the next )ears and then decreasin the ro!th rate to +. percent per )ear. he compan) Just paid its annual dividend in the amount of =0.(0 per share. What is the current value of one share of this stock if the re2uired rate of return is 1. percent" #. =1.8( %. =(.0 C. =(.5 &. =(.31 '. =+.0
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: !$o-stage gro$t%
8-3
Chapter 08 - Stock Valuation
81. KG #irlines paid an annual dividend of =1.( a share last month. he compan) is plannin on pa)in =1.0, =1.3, and =1.80 a share over the next + )ears, respectivel). #fter that, the dividend !ill be constant at =( per share per )ear. What is the market price of this stock if the market rate of return is 10. percent" #. =1.58 %. =1/.03 C. =18.( &. =(1.1/ '. =(.10
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8(. Dene!
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8-3
Chapter 08 - Stock Valuation
8+. &iets or ou announced toda) that it !ill bein pa)in annual dividends next )ear. he first dividend !ill be =0.1( a share. he follo!in dividends !ill be =0.1, =0.(0, =0.0, and =0./0 a share annuall) for the follo!in )ears, respectivel). #fter that, dividends are proJected to increase b) percent per )ear. ?o! much are )ou !illin to pa) to bu) one share of this stock toda) if )our desired rate of return is 8. percent" #. =5./3 %. =5.5 C. =10.+8 &. =10.0 '. =10.8/
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8. Cr)stal >lass recentl) paid =+./0 as an annual dividend. uture dividends are proJected at =+.80, =.10, and =.( over the next + )ears, respectivel). %einnin )ears from no!, the dividend is expected to increase b) +.( percent annuall). What is one share of this stock !orth to )ou if )ou re2uire a 1(. percent rate of return on similar investments" A. =(.5( %. =+.0 C. =.1( &. =.88 '. =/.0
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8-3/
Chapter 08 - Stock Valuation
8. Ganle) 'nterprises pa)s a constant dividend of =0./0 a share. he compan) announced toda) that it !ill continue to pa) the dividend for another ( )ears after !hich time all dividends !ill cease. What is one share of this stock !orth toda) if the re2uired rate of return is 1/. percent" #. =0.5( B. =0.5/ C. =1.0 &. =1.05 '. =1.(0
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8/. ester)ear Aroductions pa)s no dividend at the present time. he compan) plans to start pa)in an annual dividend in the amount of =0.0 a share for t!o )ears commencin four )ears from toda). #fter that time, the compan) plans on pa)in a constant =0.3 a share annual dividend indefinitel). ?o! much are )ou !illin to pa) to bu ) a share of this stock toda) if )our re2uired return is 11./ percent" #. =+.38 B. =.(( C. =.+3 &. =.31 '. =.58
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8-33
Chapter 08 - Stock Valuation
83. S!eatshirts 4nlimited is do!nsi$in. he compan) paid a =(.80 annual dividend last )ear. he compan) has announced plans to lo!er the dividend b) ( percent each )ear. ;nce the dividend amount becomes $ero, the compan) !ill cease all dividends and o out of business. ou have a re2uired rate of return of 1. percent on this particular stock iven the compan)*s situation. What are )our shares in this firm !orth toda) on a per share basis" A. =.15 %. =/.51 C. =8./8 &. =15.(5 '. =((.11
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Negative gro$t%
88. &exter Fetals, paid its first annual dividend )esterda) in the amount of =0.18 a share. he compan) plans to double each annual dividend pa)ment for the next + )ears. #fter that time, it plans to pa) =1.( a share for ( )ears than then pa) a constant dividend of =1./0 per share indefinitel). What is one share of this stock !orth toda) if the market rate of return on similar securities is 10.( percent" #. =1(.+( %. =1(.33 C. =1+.(0 &. =1.(/ '. =1.35
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant gro$t%
8-38
Chapter 08 - Stock Valuation
85. Farshall #rts Studios Just paid an annual dividend of =1.+/ a share. he firm plans to pa) annual dividends of =1.0, =1./, and =1.8 over the next + )ears, respectivel). #fter that time, the dividends !ill be held constant at =1./0 per share. What is this stock !orth toda) at a 5 percent discount rate" #. =1.08 %. =1.+0 C. =1/./3 &. =1/.35 E. =13./
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
50. ?ome Care Aroviders is pa)in an annual dividend of =1.10 ever) other )ear. he last dividend !as paid t!o )ears ao. he firm !ill continue this polic) until + more dividend pa)ments have been paid. ;ne )ear after the last dividend normal pa)ment, the compan) plans to pa) a final li2uidatin dividend of =0 per share. What is the current market value of this stock if the re2uired return is 13 percent" #. =18.5( B. =(0.3 C. =(+.1/ &. =(.1 '. =(.+
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
8-35
Chapter 08 - Stock Valuation
51. Gast )ear, ?ansen &eliver) paid an annual dividend of =+.(0 per share. he compan) has been reducin the dividends b) 10 percent annuall). ?o! much are )ou !illin to pa) to purchase stock in this compan) if )our re2uired rate of return is 11. percent" #. =1.5( %. =3.83 C. =1+.0 &. =(1.1/ '. =(.08
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: Negative gro$t%
5(. %eatrice Farkets is expectin a period of intense ro!th and has decided to retain more of its earnins to help finance that ro!th. #s a result, it is oin to reduce its annual dividend b) +0 percent a )ear for the next ( )ears. #fter that, it !ill maintain a constant dividend of =(.0 a share. Gast )ear, the compan) paid =+./0 as the annual dividend per share. What is the market value of this stock if the re2uired rate of return is 1. percent" #. =1./+ B. =1/.30 C. =18.08 &. =15./1 '. =(1.(+
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
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Chapter 08 - Stock Valuation
5+. %onnie*s
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Nonconstant #ivi#en#s
5. EIE oods !ants to issue some 3 percent preferred stock that has a stated li2uidatin value of =100 a share. he compan) has determined that stocks !ith similar characteristics provide a 1(.8 percent rate of return. What should the offer price be" #. =+3.(/ %. =1.+8 C. =8.(0 D. =./5 '. =/(./0
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: )referre# stoc(
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Chapter 08 - Stock Valuation
5. he preferred stock of Dail Gines,
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: )referre# stoc(
5/. Farie o!ns shares of &eltona Aroductions preferred stock !hich she sa)s provides her !ith a constant 1.+ percent rate of return. he stock is currentl) priced at =. a share. What is the amount of the dividend per share" #. =/.00 %. =/.( C. =/.0 &. =/./0 '. =3.00 & B 0.1+ × =. B =/.0
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: )referre# stoc(
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Chapter 08 - Stock Valuation
53. L)lo,
AACSB: Analytic Difficulty: Basic Learning Objective: 8-1 Section: 81 !o"ic: )referre# stoc(
Essay Questions
58. What are the primar) differences and similarities bet!een 6#S and the 6S'" he 6S' has a ph)sical tradin floor in 6e! ork Cit), is primaril) a broker market, relies on specialists for li2uidit) under a sinle market maker s)stem, utili$es the Super&; s)stem, and has stricter listin re2uirements. 6#S is an electronic net!ork of dealers and utili$es a multiple market maker s)stem. 6#S is open to 'C6s but the 6S' is not. 6#S has no ph)sical tradin floor. eedback Defer to section 8.+
AACSB: 4eflective t%in(ing Difficulty: 0nter&e#iate Learning Objective: 8-+ Section: 8+ !o"ic: N2S an# NASDA3
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Chapter 08 - Stock Valuation
55. 4sin the dividend ro!th model, explain !h) a firm !ould be hesitant to reduce the ro!th rate of its dividends. he dividend ro!th model states that At B &tM19D - :. # reduction in the ro!th rate !ill reduce both &tM1 and . Go!erin the value of these variables !ill effectivel) lo!er the value of the firm*s stock, !hich is somethin firms are hesitant to do. eedback Defer to section 8.1
AACSB: 4eflective t%in(ing Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Divi#en# gro$t% &o#el
100. Kelle) !ants to purchase shares in Classic Kars,
AACSB: 4eflective t%in(ing Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 8' !o"ic: Co&&on an# "referre# stoc(
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Chapter 08 - Stock Valuation
101. 'xplain !h) small shareholders should prefer cumulative votin over straiht votin. With straiht votin, a shareholder must control a maJorit) 90 percent plus one: of the outstandin shares of stock to ain access to a seat on the board of directors. With cumulative votin, a shareholder can control one seat on the board b) controllin a lesser number of shares. he number of shares needed to obtain one seat under cumulative votin is computed as N196M1:O percent M 1 of the outstandin shares, !here 6 is the number of open seats.
AACSB: 4eflective t%in(ing Difficulty: 0nter&e#iate Learning Objective: 8-' Section: 8' !o"ic: oting
10(. ed, a !ealth) individual, plans to purchase +0 percent of a firm*s Class # shares of outstandin stock. ?e believes that such a purchase !ill allo! him to control the firm b) electin his candidates to the board over time as current board member*s terms expire. he firm has a cumulative votin process. What factors should ed be considerin and !h) to ensure he can ain the control he desires" Since the stock ed plans to purchase is denoted as Class #, ed should determine if the firm has other classes of stock outstandin and if so, ho! that !ill affect the outcome of an) election. >enerall) speakin, different classes of stock are assined different votin rihts.
AACSB: 4eflective t%in(ing Difficulty: 0nter&e#iate Learning Objective: 8-' Section: 8' !o"ic: Stoc( classes
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Chapter 08 - Stock Valuation
10+. 'xplain the primar) chane that occurred in the structure of the 6S' in (00/ and ho! that chane affected the exchane members. roup, roup,
AACSB: 4eflective t%in(ing Difficulty: Basic Learning Objective: 8-+ Section: 8+ !o"ic: !o"ic: N2S structure
Multiple Choice Questions
10. Eefferson Fills Just paid a dividend of =1./ per share on its stock. he dividends are expected to ro! at a constant rate of 8 percent per )ear, indefinitel). indefinitel). What !ill the price of this stock be in 3 )ears if investors re2uire a 1 percent rate of return" #. =(8.18 #. =(8.18 %. =+(.0 %. =+(.0 C. =+3./ C. =+3./ D. =1.( '. =+.++ '. =+.++
AACSB: Analytic Difficulty: Basic OC 7: 8-1 Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
10. he next dividend pa)ment b) ?illside Farkets !ill be =(.+ per share. he dividends are anticipated to maintain a . percent ro!th rate forever. he stock currentl) sells for =30 per share. What is the dividend )ield" #. +.(0 #. +.(0 percent B. +.+/ percent C. +. C. +. percent &. .0 &. .0 percent '. .81 '. .81 percent
AACSB: Analytic Difficulty: Basic OC 7: 8-+ Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Divi#en# yiel#
10/. he Stiller Corporation !ill pa) a =+.80 =+ .80 per share dividend next )ear. he compan) pledes to increase its dividend b) (. percent indefinitel). ?o! much are )ou !illin to pa) to purchase this compan)*s stock toda) if )ou re2uire a /.5 percent return on )our investment" #. =.03 #. =.03 %. =/+.05 %. =/+.05 C. =3(.(( C. =3(.(( &. =38.3 &. =38.3 E. =8.
AACSB: Analytic Difficulty: Basic OC 7: 8- Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
103. Suppose )ou kno! a compan)*s stock currentl) sells for =50 per share and the re2uired return on the stock is 10 percent. p ercent. ou ou also kno! that the total return on the stock is evenl) divided bet!een a capital ains )ield and a dividend )ield. What is the current dividend if it*s the compan)*s polic) to al!a)s maintain a constant ro!th rate in its dividends" #. =.18 #. =.18 B. =.(5 C. =.+3 C. =.+3 &. =.0 &. =.0 '. =./ '. =./ &ividend )ield B 0.10( B 0.0 &1 B 0.0 × =50 B =.0 &0 B =.01.0 B =.(5
AACSB: Analytic Difficulty: Basic OC 7: 8-9 Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Current #ivi#en#
108. Whistle Stop rains pa)s a constant =1/ dividend on its stock. he compan) !ill maintain this dividend for the next 1 )ears and !ill then cease pa)in dividends d ividends forever. What is the current price per share if the re2uired return on this stock is 1 percent" #. =33.38 #. =33.38 %. =8(.8 %. =8(.8 C. =51.5 &. =10/./3 &. =10/./3 '. =11(.00 '. =11(.00
AACSB: Analytic Difficulty: Basic OC 7: 8- Learning Objective: 8-1 Section: 81 !o"ic: !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
105. Forristo!n
AACSB: Analytic Difficulty: Basic OC 7: 8-8 Learning Objective: 8-1 Section: 81 !o"ic: 4e5uire# return
110. he armer*s Farket Just paid an annual dividend of = on its stock. he ro!th rate in dividends is expected to be a constant percent per )ear indefinitel).
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-1; Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
111. Sprinboro ech is a )oun start-up compan). 6o dividends !ill be paid on the stock over the next 1 )ears, because the firm needs to plo! back its earnins to fuel ro!th. he compan) !ill pa) a =1( per share dividend in 1/ )ears and !ill increase the dividend b) + percent per )ear thereafter. What is the current share price if the re2uired return on this stock is 8 percent" A. =3.// %. =88.15 C. =1(0.00 &. =1/.5 '. =(0.00
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-11 Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
11(. >allo!a),
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-1' Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
11+. Een*s ashions is ro!in 2uickl). &ividends are expected to ro! at a (( percent rate for the next + )ears, !ith the ro!th rate fallin off to a constant 8 percent thereafter. he re2uired return is 1( percent and the compan) Just paid a =+.80 annual dividend. What is the current share price" #. =1(8.5/ %. =1+1.11 C. =1/.13 &. =18.83 '. =1(.(0
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-1 Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
11. ?ard!oods,
AACSB: Analytic Difficulty: 0nter&e#iate Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
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Chapter 08 - Stock Valuation
11. %echtel Fachiner) stock currentl) sells for =0 per share. he market re2uires a 1 percent return on the firm*s stock. he compan) maintains a constant 8 percent ro!th rate in dividends. What !as the most recent annual dividend per share paid on this stock" #. =+.00 B. =+.( C. =+.0 &. =+./3 '. =+.51
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-1 Learning Objective: 8-1 Section: 81 !o"ic: Current #ivi#en#
11/. Southern 4tilities Just issued some ne! preferred stock. he issue !ill pa) a =15 annual dividend in perpetuit) beinnin 5 )ears from no!. What is one share of this stock !orth toda) if the market re2uires a 3 percent return on this investment" A. =13.53 %. =1/.1/ C. =185.08 &. =(1.1 '. =(31.+
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-18 Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
8-5(
Chapter 08 - Stock Valuation
113. %i alls ours Just paid a dividend of =1. per share. he dividends are expected to ro! at +0 percent for the next 8 )ears and then level off to a 3 percent ro!th rate indefinitel). What is the price of this stock toda) iven a re2uired return of 1 percent" #. =/3. %. =/5.50 C. =3(.3 D. =33./3 '. =38.15
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-'; Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
118. ?arve) Count) Choppers,
AACSB: Analytic Difficulty: 0nter&e#iate OC 7: 8-'1 Learning Objective: 8-1 Section: 81 !o"ic: Stoc( "rice
8-5+
