Question 1

The Red Bud Co.just paid a dividend of $1.20 a share.The company announced today that it will continue to pay this constant dividend for the next three 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 8%?

Accepted Answer

The correct answer is A because the present value of the dividends is $3.09. The present value of a constant dividend is calculated as follows:PV = D / rwhere:PV is the present valueD is the dividendr is the required rate of returnIn this case, the dividend is $1.20 and the required rate of return is 8%, so the present value is:PV = $1.20 / 0.08 = $3.09

Question 2

Bill Bailey and Sons pays no dividend at the present time.The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today.After that time,the company plans on paying a constant $1 a share dividend indefinitely.How much are you willing to pay to buy a share of this stock if your required return is 15%?

Accepted Answer

To calculate the stock price, we use the present value of future cash flows formula.

First, we need to calculate the present value of the two-year dividend:

PV of two-year dividend = ($.30 / 1.15) + [($.30 / 1.15^2) / (1.15 - 1)]
PV of two-year dividend = $0.2609

Next, we need to calculate the present value of the perpetual dividend using the constant growth formula:

PV of perpetual dividend = ($1 / (0.15 - 0.01))
PV of perpetual dividend = $8.33

Finally, we add the present values of the two-year dividend and perpetual dividend:

Stock price = $0.2609 + $8.33
Stock price = $8.59

Therefore, the answer is B) $4.81, which is the closest option.

Question 3

NU YU announced today that it will begin paying annual dividends.The first dividend will be paid next year in the amount of $.25 a share.The following dividends will be $.40,$.60,and $.75 a share annually for the following three years,respectively.After that,dividends are projected to increase by 3.5% per year.How much are you willing to pay to buy one share of this stock if your desired rate of return is 12%?

Accepted Answer

To calculate the present value of the stock, we need to use the dividend discount model. We know the dividends for the next five years, so we can calculate the present value of those dividends and the present value of the expected price of the stock after five years when the dividend growth rate becomes constant. Using a financial calculator or Excel, the present value of the dividends for the first five years is $2.24. The present value of the expected price of the stock after five years is $15.41. The sum of these present values is $17.65. That means the stock is worth $17.65 today. Our desired rate of return is 12%, so the maximum we are willing to pay for the stock is the present value of its future cash flows divided by (1 + 0.12), which is $7.25 (rounded to the nearest cent). Therefore, answer choice C is the best choice.

Question 4

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.These dividends are expected to grow at a rate of 5% in the foreseeable future.The risk of this company suggests that future cash flows should be discounted at a rate of 11%.

Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the expected dividend next year, r is the discount rate, and g is the growth rate. D1 = $2.25 * (1 + 0.05) = $2.3625. P = $2.3625 / (0.11 - 0.05) = $39.375, which is closest to $39.38.

Question 5

Nu-Tek,Inc.is expecting a period of intense growth,so it has decided to retain more of its earnings to help finance that growth.As a result it is going to reduce its annual dividend by 10% a year for the next three years.After that it will maintain a constant dividend of $.70 a share.Last year,the company paid $1.80 per share.What is the market value of this stock if the required rate of return is 13%?

Accepted Answer

The answer of Nu-Tek,Inc.is expecting a period of intense growth,so...

Question 6

The Lighthouse Co.is in a downsizing mode.The company paid a $2.50 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 16% on this particular stock given the company's situation.What is one share of this stock worth to you today?

Accepted Answer

The answer of The Lighthouse Co.is in a downsizing mode.The...

Question 7

Jim owns shares of Abco,Inc.preferred stock which he says provides him with a constant 6.58% rate of return.The stock is currently priced at $45.60 a share.What is the amount of the dividend per share?

Accepted Answer

The answer of Jim owns shares of Abco,Inc.preferred stock which...

Question 8

The Extreme Reaches Corp.last paid a $1.50 per share annual dividend.The company is planning on paying $3.00,$5.00,$7.50,and $10.00 a share over the next four years,respectively.After that the dividend will be a constant $2.50 per share per year.What is the market price of this stock if the market rate of return is 14%?

Accepted Answer

The answer of The Extreme Reaches Corp.last paid a $1.50...

Question 9

Mortgage Instruments Inc.is expected to pay dividends of $1.04 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 6%?

Accepted Answer

The dividend growth model (Gordon Growth Model) is used: P = D1 / (r - g). Here, D1 = $1.04, r = 0.06, and g = 0.04. So, P = 1.04 / (0.06 - 0.04) = $52.00.

Question 10

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 6% rate of return?

Accepted Answer

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

Question 11

BC 'n D just paid its annual dividend of $.60 a share.The projected dividends for the next five years are $.30,$.50,$.75,$1.00,and $1.20,respectively.After that time,the dividends will be held constant at $1.40.What is this stock worth today at a 6% discount rate?

Accepted Answer

The answer of BC 'n D just paid its annual...

Question 12

The preferred stock of North Coast Shoreline pays an annual dividend of $1.60 and sells for $20.65 a share.What is the dividend yield on this security?

Accepted Answer

Dividend yield is calculated as follows:

Dividend yield = Annual dividend / Stock price

Plugging in the given values, we get:

Dividend yield = $1.60 / $20.65 = 0.0775 or 7.75%

Therefore, the answer is B) 7.75%.

Question 13

Beaksley,Inc.is a very cyclical type of business that is reflected in its dividend policy.The firm pays a $2.00 a share dividend every other year.The last dividend was paid last year.Five years from now,the company is repurchasing all of the outstanding shares at a price of $55 a share.At an 9% rate of return,what is this stock worth today?

Accepted Answer

To calculate the present value of the stock, we need to discount the future cash flows back to their present value. Since the company pays $2.00 dividend every other year, we need to calculate the present value of an annuity due. Using a financial calculator, we get:

PV = $2.00 [(1 - (1 / (1 + 0.09)^10)) / 0.09] + $55 / (1 + 0.09)^5
PV = $2.00 [7.5403] + $29.35
PV = $38.85

Therefore, the stock is worth $38.85 today. The correct answer is C.

Question 14

Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success.The company paid its first annual dividend yesterday in the amount of $.28 a share.The company plans to double each annual dividend payment for the next three years.After that time,it is planning on paying a constant $1.50 per share indefinitely.What is one share of this stock worth today if the market rate of return on similar securities is 11.5%?

Accepted Answer

The answer of Mother and Daughter Enterprises is a relatively...

Question 15

Butterup's 'N More wants to offer some preferred stock that pays an annual dividend of $2.00 a share forever.The company has determined that stocks with similar characteristics provide a 10% rate of return.What price should Butterup's expect to receive per share for this stock offering?

Accepted Answer

The price of a preferred stock can be calculated using the formula: Price = Dividend / Rate of Return. Here, Price = $2.00 / 0.10 = $20.00.

Question 16

The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 5% a year for the next two years.After that,Double Dip will maintain a constant dividend of $1 a share.Last year,the company paid $1.40 per share.What is this stock worth to you if you require a 9% rate of return?

Accepted Answer

The stock's worth is calculated by discounting the expected dividends at the required rate of return. The dividends for the next two years are $1.33 and $1.26, respectively, after a 5% reduction each year. From year 3 onwards, the dividend is constant at $1. The present value of these dividends, discounted at 9%, gives the stock's worth as $11.64.

Question 17

Now or Later,Inc.recently paid $1.10 as an annual dividend.Future dividends are projected at $1.14,$1.18,$1.22,and $1.25 over the next four years,respectively.After that,the dividend is expected to increase by 2% annually.What is one share of this stock worth to you if you require an 8% rate of return on similar investments?

Accepted Answer

The answer of Now or Later,Inc.recently paid $1.10 as an...

Question 18

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.85 per year? The next dividend will be paid in exactly 1 year.The required rate of return is 14.5%.

Accepted Answer

To figure out the maximum an investor should pay for the common stock, we can use the dividend discount model, which is:

stock price = dividend / (required rate of return - dividend growth rate)

Since there are no growth opportunities, the dividend growth rate is 0.

Plugging in the given values, we get:

stock price = $1.85 / (0.145 - 0) = $12.76

Therefore, the maximum an investor should pay for the common stock is $12.76.

The answer is C, $12.76.

Question 19

You want to earn a 12% rate of return.Panco,Inc.preferred stock pays a $4.50 annual dividend.What is the maximum price you are willing to pay for one share of this stock?

Accepted Answer

To calculate the maximum price, we need to use the dividend discount model formula:
Max price = Dividend / (Rate of return as a decimal)
Plugging in the values, we get:
Max price = 4.50 / (0.12) = $37.50
Therefore, the maximum price we are willing to pay for one share of this stock is $37.50, which is option B.

Question 20

Last week,Railway Cabooses paid their annual dividend of $1.20 per share.The company has been reducing the dividends by 5% each year.How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?

Accepted Answer

The answer of Last week,Railway Cabooses paid their annual dividend...

Quiz 6: Stock Valuation