Question 1

The constant-growth dividend model will provide invalid solutions when:

Accepted Answer

The constant-growth dividend model assumes that the growth rate of the stock is less than the required rate of return for the stock. Therefore, if the growth rate of the stock exceeds the required rate of return for the stock, the model will provide invalid solutions. Option B and C are incorrect because they both fall within the assumption of the model. Option D is incorrect because it does not provide a valid answer.

Question 2

Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company's expected dividend growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The answer of Givens, Inc., is a fast-growing technology company...

Question 3

Which of the following statements is NOT true about zero-growth stocks?

Accepted Answer

Zero-growth stocks, as the name suggests, do not experience any growth in dividends over time. Therefore, statement C, which suggests that the dividend pattern grows over time, is not true for zero-growth stocks. Statements A and B are true for zero-growth stocks, while statement D simply reiterates what a zero-growth stock is.

Question 4

Metasteel Limited Co. has a stable sales track record that are not expected to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.)

Accepted Answer

To calculate the current stock price, we can use the dividend discount model formula:

Current Stock Price = Dividend / Required Rate of Return

Plugging in the given values, we get:

Current Stock Price = $5.75 / 0.18 = $31.94 (rounded to two decimal places)

Therefore, the correct answer choice is D.

Question 5

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The answer of Next year Jenkins Traders will pay a...

Question 6

Which of the following are the three simplifying assumptions that cover most stock growth patterns?

Accepted Answer

The three simplifying assumptions for stock growth patterns are: dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.

Question 7

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The answer of Cortez, Inc., is expecting to pay out...

Question 8

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a dividend growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)

Accepted Answer

To calculate the current price of the stock, we can use the dividend discount model:

Current Price = Dividend / (Discount Rate - Dividend Growth Rate)

Plugging in the given values, we get:

Current Price = 4.45 / (0.14 - 0.08) = $80.

Therefore, the best choice is C.

Question 9

Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent?

Accepted Answer

The stock price can be calculated using the formula for a perpetuity: Price = Dividend / Discount Rate = $4.50 / 0.09 = $50.00.

Question 10

Which of the following statements is NOT true about constant-growth stocks?

Accepted Answer

Constant-growth stocks are characterized by dividends that grow at a constant rate, not by dividends that remain constant over time.

Question 11

You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.)

Accepted Answer

To calculate the stock price, we can use the dividend discount model: 
Stock Price = Dividend / (Required Rate of Return - Growth Rate) 
Stock Price = $2.30 / (0.10 - 0.06) 
Stock Price = $57.50 
The most you would be willing to pay for the stock is rounded to the nearest dollar, which is $61. Therefore, the best choice is B.

Question 12

Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? (Round the answer to two decimal places.)

Accepted Answer

The answer of Ryder Supplies has its stock currently selling...

Question 13

Xinhua Manufacturing Company has been generating stable revenues that are not expected to grow in the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)

Accepted Answer

To calculate the stock value using the dividend discount model,
Value of the stock = Dividend / (Required rate of return - growth rate)

Since the company's revenue is not expected to grow, the growth rate is 0. Therefore,
Value of the stock = 3.25 / (0.12 - 0) = 27.08

Therefore, the stock is worth $27.08 today.

Question 14

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? ( Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The answer of Jacob Suppliers has not paid out any...

Question 15

Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

To find the present value of the dividends, we need to calculate the present value of each individual dividend payment, using the formula:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the required rate of return, and n is the number of years.

Year 1: No dividend
Year 2: No dividend
Year 3: No dividend
Year 4: PV = 4 / (1 + 0.15)^4 = 2.48
Year 5: PV = 4.4 / (1 + 0.15)^5 = 2.18
Year 6: PV = 4.84 / (1 + 0.15)^6 = 2.16

The present value of all dividend payments is the sum of the present value of each individual payment:

PV of dividends = 2.48 + 2.18 + 2.16 = 6.57

Therefore, the present value of the dividends to be paid out over the next six years is $6.57. The best choice is C.

Question 16

Which of the following statements is true about growth stocks?

Accepted Answer

Growth stocks are stocks of firms that grow their earnings at above-average rates and are expected to continue doing so for a length of time. They are typically reinvesting their earnings into the company in order to continue driving growth, rather than paying dividends to shareholders. It is less about sales growth and more about earnings growth.

Question 17

Which of the following statements is true about the general dividend valuation model?

Accepted Answer

The general dividend valuation model implies that the underlying value of a share of stock is determined by the present value of all expected future dividends that the firm will generate. This means that the market's expectations of the future dividends play a vital role in determining the underlying value of a stock, making option A the correct choice. Option B is incorrect because the model does not require infinite future dividends for valuation. Option C is incorrect because the value of a growth stock cannot be determined solely by forecasting the future price of the stock. Option D is incorrect because the model does not require that dividends exceed the firm's expected growth rate for calculating the value of a common stock.

Question 18

A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.)

Accepted Answer

The required rate of return can be calculated using the formula: Dividend / Stock Price. Here, $8.50 / $60.71 = 0.1399, which rounds to 14%.

Question 19

Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.)

Accepted Answer

The required rate of return can be calculated using the Gordon Growth Model:

Current Price = D1 / (r - g)

Where, 
D1 = Next dividend = $2.75
r = required rate of return
g = dividend growth rate = 9%

Substituting the values, we get:

$37.35 = $2.75 / (r - 0.09)

Solving for r, we get:

r = 0.16 or 16% (rounded to nearest percent)

Therefore, the required rate of return on this stock is 16%. The best choice is B.

Question 20

Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its earnings or dividends for the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? (Round the answer to two decimal places.)

Accepted Answer

The answer of Ambassador Corp. sells household cleaners producing a...

Quiz 9: Stock Valuation