Question 1

A ﬁrm's stock has a required return of 10%. The stock's dividend yield is 6%. What is the dividend the ﬁrm is expected to pay in one year if the current stock price is $40?

Accepted Answer

Dividend yield is the annual dividend per share divided by the current stock price, which is 6% in this case. 
So, the annual dividend per share = 6% * $40 = $2.40.

Question 2

If a company has a current stock price of $45, an EPS of $3/share; EPS growth rate of 10% and the investors rate of return is 15%, calculate the cash cow price.

Accepted Answer

Using the Gordon Growth Model formula: 
Cash Cow Price = EPS / (investor rate of return - EPS growth rate)

Cash Cow Price = $3 / (15% - 10%) 
Cash Cow Price = $3 / 5% 
Cash Cow Price = $60

However, the question is asking for the "current price," so we need to use the formula:

Current Price = Cash Cow Price / (1 + investor rate of return) 
Current Price = $60 / (1 + 15%) 
Current Price = $52.17

Since the current stock price is $45, the stock is undervalued and a good buy. The gap between the cash cow price and the current stock price is $52.17 - $45 = $7.17, which is about 16% higher than the current stock price.

Thus, the best choice is C, $20.

Question 3

The Johnson Company just paid an annual dividend of $1.60. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a
9% rate of return?

Accepted Answer

The answer of The Johnson Company just paid an annual...

Question 4

China Imports paid a $1.50 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if the appropriate
Discount rate is 12%?

Accepted Answer

The answer of China Imports paid a $1.50 per share...

Question 5

Shares of Blue Dye, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Blue Dye have been increasing at a rate of 2.4% and are expected to
Continue at this rate. What is the expected amount of the next dividend?

Accepted Answer

The answer of Shares of Blue Dye, Inc. are currently...

Question 6

Suppose the Pale Hose Corp. is expected to pay a dividend next year of $1.75 per share. Both sales and proﬁts for Pale Hose are expected to grow at a rate of 15% for the following two years and then
At 2% per year thereafter indeﬁnitely. Dividend growth is expected to match sales growth. If the
Required return is 14%, what is the value of a share of Pale Hose?

Accepted Answer

To calculate the value of Pale Hose Corp's share, we can use the dividend discount model (DDM) as follows:

D1 = $1.75 (given)
g1 = 15% (sales and profit growth rate)
g2 = 15% (sales and profit growth rate)
g3 onwards = 2% (growth rate after 2 years)
r = 14% (required return)

First, we need to calculate the dividends for the next two years:

D2 = D1 x (1 + g1) = $1.75 x (1 + 15%) = $2.01
D3 = D2 x (1 + g2) = $2.01 x (1 + 15%) = $2.31

Then, we can use the dividend discount model formula to calculate the present value of the expected future dividends:

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

where n is the year when the growth rate becomes constant (in this case, n = 2).

PV = $1.75/(1+14%) + $2.01/(1+14%)^2 + $2.31/(1+14%)^3 + ... + $2.31/(14%-2%)

PV = $1.53 + $1.55 + $1.58 + ... + $82.14

PV = $17.92

Therefore, the value of a share of Pale Hose Corp. under these assumptions is $17.92. The closest answer choice is C.

Question 7

A ﬁrm's stock has a required return of 10%. The stock's dividend yield is 6%. What dividend did the ﬁrm just pay if the current stock price is $40?

Accepted Answer

The answer of A ﬁrm's stock has a required return...

Question 8

Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever.
Stocks of similar risk yield 10%.
The price of Bradley Broadcasting stock today should be:

Accepted Answer

To calculate the price of the stock today, we need to use the dividend discount model:

PV = D1/(1 + r) + D2/(1 + r)^2 + D3/(1 + r)^3 + (D3*(1 + g))/(r - g)/(1 + r)^3

where:
PV = the price of the stock today
D1, D2, D3 = dividends expected to be paid in one, two, and three years, respectively
r = the required rate of return, which is 10% for stocks of similar risk
g = the constant growth rate of dividends, which is 4% in this case

Substituting the values given in the question, we get:

PV = 1.10/(1 + 0.10) + 1.21/(1 + 0.10)^2 + 1.331/(1 + 0.10)^3 + (1.331*(1 + 0.04))/(0.10 - 0.04)/(1 + 0.10)^3
PV = 20.33

Therefore, the price of the stock today should be $20.33. Choice C is the best option.

Question 9

Main Street Tool & Die is in a downsizing mode. The company paid a $2 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend
Amount becomes zero, the company will cease all dividends permanently. You place a required rate
Of return of 18% on this particular stock given the company's situation. What is one share of this
Stock worth to you today?

Accepted Answer

The correct answer is A because the stock is worth $2.29 today. The dividend is $2 per year, and the required rate of return is 18%. So, the stock is worth $2 / 0.18 = $2.29.

Question 10

F & D Industry's common stock sells for $43.05 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 10%. What is the amount of the last
Dividend paid by F & D?

Accepted Answer

The dividend discount model (DDM) can be used here: P = D0 * (1 + g) / (r - g). Solving for D0, we get D0 = P * (r - g) / (1 + g). Substituting the given values: D0 = $43.05 * (0.10 - 0.05) / (1 + 0.05) = $2.05.

Question 11

The Sister's Market is preparing to pay its ﬁrst dividends. It is going to pay $.60, $1.10, and $1.50 a share over the next 3 years, respectively. After that, the company has stated that the annual
Dividend will be $1.98 per share indeﬁnitely. What is this stock worth to you per share if you demand
A 9% rate of return?

Accepted Answer

The answer of The Sister's Market is preparing to pay...

Question 12

A stock pays a constant annual dividend and sells for $31.11 a share. If the rate of return on this stock is 9%, what is the dividend amount?

Accepted Answer

The answer of A stock pays a constant annual dividend...

Question 13

Biogenetics, Inc. plans to retain and reinvest all of its earnings for the next 30 years. Beginning in year 31, the ﬁrm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate
Annually thereafter. Given a required return of 15%, what the stock should sell for today?

Accepted Answer

The answer of Biogenetics, Inc. plans to retain and reinvest...

Question 14

Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indeﬁnitely. Returns on the stock of ﬁrms like NoGro are currently running 15%.
What is the value of one share of stock?

Accepted Answer

The value of a share of stock can be calculated using the constant dividend growth model: 
Value of share = D/(r-g) 
where D is the annual dividend, r is the required rate of return, and g is the expected constant growth rate of dividends. In this case, D = $2.90 and g = 0% (since subsequent dividends will remain at $2.90 indefinitely). 
Plugging in the numbers, we get: 
Value of share = $2.90/(0.15-0) = $19.33 
Therefore, the value of one share of stock is $19.33.

Question 15

The Brown Company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay
For one share of the Brown Company stock if you require a 12% rate of return?

Accepted Answer

To find the price of the stock, use the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the dividend next year ($1.68), r is the required rate of return (12% or 0.12), and g is the growth rate (2.5% or 0.025). P = 1.68 / (0.12 - 0.025) = 1.68 / 0.095 = $17.68.

Question 16

Rosebud Florists pays a constant dividend of $1.50 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends
Permanently. What is one share of this stock worth today if the required rate of return is 7.5%?

Accepted Answer

To calculate the value of the stock today, we need to find the present value of the future dividends for the next 2 years and the present value of the stock at the end of year 2 when the dividends stop. Using the formula for the present value of a perpetuity:
PV = D/(r-g), where D is the dividend, r is the required rate of return, and g is the growth rate (which is zero in this case because the dividends are constant).
PV of 2 years of dividends = $1.50/(1+0.075)^1 + $1.50/(1+0.075)^2 = $2.69
PV of the stock at the end of year 2 = $1.50/(0.075-0) / (1+0.075)^2 = $15.99
Total PV = $2.69 + $15.99 = $18.68
Therefore, one share of this stock is worth $18.68 today, and the closest option is C) $2.69.

Question 17

Can't Hold Me Back, Inc. is preparing to pay its ﬁrst dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the
Annual dividend will be $1.25 per share indeﬁnitely. What is this stock worth to you per share if you
Demand a 7% rate of return?

Accepted Answer

The answer of Can't Hold Me Back, Inc. is preparing...

Question 18

Textile Importers paid a $1.60 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if your required rate of
Return is 13.5%?

Accepted Answer

The answer of Textile Importers paid a $1.60 per share...

Question 19

The common stock of Singer Machines pays an annual dividend that is expected to increase by 6% annually. The stock commands a market rate of return of 11% and sells for $54.20 a share. What is
The expected amount of the next dividend?

Accepted Answer

The answer of The common stock of Singer Machines pays...

Question 20

Jessica's Home Interiors offers a common stock that pays an annual dividend of $1.60 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one
Share of this stock today if you want to earn a 9% return on your investments?

Accepted Answer

The price of a stock with a constant dividend can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, Price = $1.60 / 0.09 = $17.78.

Quiz 8: Stock Valuation

A ﬁrm's stock has a required return of 10%. The stock's dividend yield is 6%. What is the dividend the ﬁrm is expected to pay in one year if the current stock price is $40?

If a company has a current stock price of $45, an EPS of $3/share; EPS growth rate of 10% and the investors rate of return is 15%, calculate the cash cow price.

The Johnson Company just paid an annual dividend of $1.60. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a 9% rate of return?

China Imports paid a $1.50 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if the appropriate Discount rate is 12%?

Shares of Blue Dye, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Blue Dye have been increasing at a rate of 2.4% and are expected to Continue at this rate. What is the expected amount of the next dividend?

A ﬁrm's stock has a required return of 10%. The stock's dividend yield is 6%. What dividend did the ﬁrm just pay if the current stock price is $40?

Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%. The price of Bradley Broadcasting stock today should be:

F & D Industry's common stock sells for $43.05 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 10%. What is the amount of the last Dividend paid by F & D?

A stock pays a constant annual dividend and sells for $31.11 a share. If the rate of return on this stock is 9%, what is the dividend amount?

Biogenetics, Inc. plans to retain and reinvest all of its earnings for the next 30 years. Beginning in year 31, the ﬁrm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate Annually thereafter. Given a required return of 15%, what the stock should sell for today?

Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indeﬁnitely. Returns on the stock of ﬁrms like NoGro are currently running 15%. What is the value of one share of stock?

The Brown Company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay For one share of the Brown Company stock if you require a 12% rate of return?

Rosebud Florists pays a constant dividend of $1.50 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends Permanently. What is one share of this stock worth today if the required rate of return is 7.5%?

Textile Importers paid a $1.60 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if your required rate of Return is 13.5%?

The common stock of Singer Machines pays an annual dividend that is expected to increase by 6% annually. The stock commands a market rate of return of 11% and sells for $54.20 a share. What is The expected amount of the next dividend?

Jessica's Home Interiors offers a common stock that pays an annual dividend of $1.60 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one Share of this stock today if you want to earn a 9% return on your investments?