Question 1

In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are suﬃcient funds available. The par value of the preferred stock is $100.

Accepted Answer

In a liquidation, preferred stockholders are typically entitled to receive the par value of their shares, which is $100 in this case, before any distribution to common stockholders.

Question 2

The Home Market has adopted a policy of increasing the annual dividend on their common stock at a constant rate of 3.75% annually. The ﬁrm is paying an annual dividend of $1.10 today. What will the
Dividend be ﬁve years from now?

Accepted Answer

Using the formula for constant growth rate, Dn = D0(1+g)^n, where Dn is the dividend in year n, D0 is the current dividend, g is the growth rate, and n is the number of years, we get:
D5 = 1.10(1+0.0375)^5
D5 = 1.32
Therefore, the dividend in year five will be $1.32, which is answer choice C.

Question 3

Preferred stock is never callable.

Accepted Answer

Preferred stock can be callable, meaning the issuer has the right to redeem the shares at a predetermined price after a certain date.

Question 4

Redline Motors has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3.5% annually. The last dividend it paid was $1.21 a share. What will its dividend be
7 years from now?

Accepted Answer

The answer of Redline Motors has adopted a policy of...

Question 5

The partial excludability of dividend income from taxable income makes preferred stock less
desirable to purchasers than it might otherwise be.

Accepted Answer

The partial excludability of dividend income from taxable income actually makes preferred stock more desirable to purchasers, as it can lead to a lower effective tax rate on the income received from such investments.

Question 6

A missed dividend payment never has to be paid if the preferred stock is cumulative.

Accepted Answer

If the preferred stock is cumulative, the missed dividend payments must be paid in the future.

Question 7

The daily newspaper lists this information on a stock: Last $36.19, Net Chg -1.63 and Yld% 1.3. What is the amount of the current dividend?

Accepted Answer

The current dividend can be calculated using the yield percentage (Yld%) and the last price of the stock. The formula is: Dividend = Last Price * (Yield / 100). Plugging in the values: $36.19 * (1.3 / 100) = $0.47047, which rounds to $0.47.

Question 8

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD%
chg 3.4, and a net chg of -.50. This means that the closing price on the previous trading day was
$32.60 and the current yield is 17.5%.

Accepted Answer

The P/E ratio does not indicate the current yield, and YTD% chg and net chg do not provide information about the previous day's closing price or current yield. Therefore, it cannot be determined from the given information what the previous day's closing price or current yield is.

Question 9

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD%
chg 3.4, and a net chg of -.50. This means that the stock price has increased by 3.4% during the
current year and the earnings per share are approximately $1.89. The closing price on the previous
trading day was $32.60 and the current yield is 17.5%.

Accepted Answer

The P/E ratio of 17.5 and dividend of .80 do not provide enough information to calculate the earnings per share. The net change of -.50 means that the stock price has declined by .50 from the previous trading day's closing price of $32.60. The 17.5% figure is not the current yield, as there is no dividend yield provided in the listing.

Question 10

Spooner Corporation's next dividend is expected to be $6. Dividend growth is estimated at 25%, 20%, 10% and then stabilize to 3%. If the rate of return is 10%, determine the stock price in year 2.

Accepted Answer

First, we need to calculate the dividends in years 1, 2, and 3:

Year 1 dividend: $6 * 1.25 = $7.50
Year 2 dividend: $7.50 * 1.20 = $9.00
Year 3 dividend: $9.00 * 1.10 = $9.90

Next, we can use the dividend discount model to calculate the stock price in year 2:

P2 = D3 / (r - g)
P2 = $9.90 / (0.10 - 0.03)
P2 = $100.64

Therefore, the correct answer is C) $100.64.

Question 11

All preferred stock has an obligatory sinking fund.

Accepted Answer

Not all preferred stock has an obligatory sinking fund. A sinking fund is a provision in some preferred stock where the issuer is required to set aside a portion of earnings to retire the shares at a future date. However, not all preferred stock has this provision.

Question 12

The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will its dividend be
In six years?

Accepted Answer

The dividend grows at a constant rate of 3% annually. Using the formula for future value of a growing dividend: Future Dividend = Last Dividend * (1 + growth rate)^number of years. So, $0.90 * (1 + 0.03)^6 = $1.11.

Question 13

The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is
The expected amount of the next dividend to be paid on Energizer's common stock?

Accepted Answer

The expected amount of the next dividend can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is: Price = Dividend / (Rate of Return - Growth Rate). Rearranging for Dividend gives: Dividend = Price * (Rate of Return - Growth Rate). Substituting the given values: Dividend = $60.50 * (0.12 - 0.10) = $1.21.

Question 14

RTF, Inc. common stock sells for $22 a share and pays an annual dividend that increases by 3.8% annually. The market rate of return on this stock is 8.2%. What is the amount of the last dividend
Paid?

Accepted Answer

The dividend discount model (DDM) can be used to find the last dividend paid: P = D0 * (1 + g) / (r - g). Solving for D0: $22 = D0 * (1 + 0.038) / (0.082 - 0.038). D0 = $0.93.

Question 15

Wilbert's Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5% annually. You would like to purchase 100 shares of stock in this ﬁrm but
Realize that you will not have the funds to do so for another three years. If you desire a 10% rate of
Return, how much should you expect to pay for 100 shares when you can afford to buy this stock?
Ignore trading costs.

Accepted Answer

The answer of Wilbert's Clothing Stores just paid a $1.20...

Question 16

For income tax purposes, preferred stock is more like debt than it is like common stock.

Accepted Answer

The answer of For income tax purposes, preferred stock is...

Question 17

The price-earnings ratios for TSX stocks which are listed in The National Post are based on earnings per share for the past year.

Accepted Answer

The statement is true. The price-earnings ratios for TSX stocks listed in The National Post are based on earnings per share for the past year.

Question 18

For the current year, the expected dividend per share is:

Accepted Answer

The answer of For the current year, the expected dividend...

Question 19

Winter Green Decors announced today that it will begin paying annual dividends. The ﬁrst dividend will be paid next year in the amount of $.40 a share. The following dividends will be $.60, $.85, and
$1.00 a share annually for the following 3 years, respectively. After that, dividends are projected to
Increase by 2% per year. How much are you willing to pay to buy one share of this stock today if
Your desired rate of return is 10%?

Accepted Answer

To calculate the present value of all future cash flows (dividends), we can use the dividend discount model:

PV = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + ... + Dn/(1+r)^n

Where:
PV = Present Value
D1, D2, D3...Dn = Dividends for each year
r = Desired rate of return

Using the information given:

D1 = $0.40
D2 = $0.60
D3 = $0.85
D4 = $1.00

Next, we need to calculate the present value of the dividends from Year 5 and beyond, which are projected to increase by 2% per year. We can use the formula:

Dn = Dn-1 x (1+g)

Where:
Dn = Dividend in Year n
Dn-1 = Dividend in Year n-1
g = Growth rate

In this case: 
D5 = $1.00 x (1+0.02) = $1.02
D6 = $1.02 x (1+0.02) = $1.04
D7 = $1.04 x (1+0.02) = $1.06
and so on.

We can then calculate the present value of these future dividends using the formula for perpetuity:

PV = Dn / (r-g)

Where: 
PV = Present value 
Dn = Dividend in year n (in this case, D5, D6, D7...)
r = Desired rate of return 
g = Growth rate (2% in this case)

Summing up all the present values of dividends, we get:

PV = $0.40/(1+0.10) + $0.60/(1+0.10)^2 + $0.85/(1+0.10)^3 + $1.00/(1+0.10)^4 + ($1.02/(0.10-0.02))/(1+0.10)^4 + ($1.04/(0.10-0.02))/(1+0.10)^5 + ($1.06/(0.10-0.02))/(1+0.10)^6 + ...

Calculating this using a financial calculator or spreadsheet software, we get:

PV = $10.89

Therefore, the best choice is B) $10.89.

Question 20

If a company has a current stock price of $78, an EPS of $1.10/share; EPS growth rate of 20% and the investors rate of return is 11.50%, calculate the cash cow price.

Accepted Answer

The answer of If a company has a current stock...

Quiz 8: Stock Valuation

In a liquidation, each share of 5% preferred stock is generally entitled to a liquidation payment of _____ as long as there are suﬃcient funds available. The par value of the preferred stock is $100.

The Home Market has adopted a policy of increasing the annual dividend on their common stock at a constant rate of 3.75% annually. The ﬁrm is paying an annual dividend of $1.10 today. What will the Dividend be ﬁve years from now?

Preferred stock is never callable.

Redline Motors has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3.5% annually. The last dividend it paid was $1.21 a share. What will its dividend be 7 years from now?

The partial excludability of dividend income from taxable income makes preferred stock less desirable to purchasers than it might otherwise be.

A missed dividend payment never has to be paid if the preferred stock is cumulative.

The daily newspaper lists this information on a stock: Last $36.19, Net Chg -1.63 and Yld% 1.3. What is the amount of the current dividend?

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD% chg 3.4, and a net chg of -.50. This means that the closing price on the previous trading day was $32.60 and the current yield is 17.5%.

Spooner Corporation's next dividend is expected to be $6. Dividend growth is estimated at 25%, 20%, 10% and then stabilize to 3%. If the rate of return is 10%, determine the stock price in year 2.

All preferred stock has an obligatory sinking fund.

The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will its dividend be In six years?

The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is The expected amount of the next dividend to be paid on Energizer's common stock?

RTF, Inc. common stock sells for $22 a share and pays an annual dividend that increases by 3.8% annually. The market rate of return on this stock is 8.2%. What is the amount of the last dividend Paid?

For income tax purposes, preferred stock is more like debt than it is like common stock.

The price-earnings ratios for TSX stocks which are listed in The National Post are based on earnings per share for the past year.

For the current year, the expected dividend per share is:

If a company has a current stock price of $78, an EPS of $1.10/share; EPS growth rate of 20% and the investors rate of return is 11.50%, calculate the cash cow price.