Question 1

Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by the firm? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

To calculate the quarterly dividend, we need to use the formula:

Dividend = Annual Dividend / Number of Payments per Year

Since the preferred stock is perpetual, the dividend stays the same each year. We can find the annual dividend by multiplying the current stock price by the dividend yield:

Annual Dividend = Stock Price x Dividend Yield

The dividend yield is simply the annual dividend divided by the stock price:

Dividend Yield = Annual Dividend / Stock Price

We are given that the required rate of return is 10.5%, which is the same as the dividend yield. Therefore:

Dividend Yield = 10.5% = 0.105

Annual Dividend = Stock Price x Dividend Yield = $83.45 x 0.105 = $8.77325

Now we can calculate the quarterly dividend:

Dividend = Annual Dividend / Number of Payments per Year = $8.77325 / 4 = $2.19331

Round to two decimal places:

Dividend = $2.19

Therefore, the correct answer is choice C.

Question 2

Discuss the significance of an active secondary market to both issuers of securities and to investors.

Accepted Answer

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Question 3

The constant growth dividend model would be useful to determine the value of all, but which of the following firms?

Accepted Answer

The answer of The constant growth dividend model would be...

Question 4

Which of the following statements is true?

Accepted Answer

The constant growth dividend model (also known as the Gordon Growth Model) assumes that dividends grow at a constant rate in perpetuity. For the model to work and not result in a negative stock price or an unrealistic valuation, the required rate of return (R) must be greater than the dividend growth rate (g). This is because the model is based on the premise that the value of the stock is the present value of all future dividends, which must be discounted at a rate higher than they grow, to ensure the present value sums to a positive number.

Question 5

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? (Round off to two decimal places.)

Accepted Answer

The current price of a perpetual preferred stock can be calculated using the formula: Price = Dividend per period / Required rate of return. Here, the quarterly dividend is $1.40, and the annual dividend is $1.40 * 4 = $5.60. The required rate of return is 8.5%, or 0.085 in decimal form. Thus, Price = $5.60 / 0.085 = $65.88.

Question 6

The preferred stock of Acme International is selling currently at $110.35. What is the dividend paid by this stock if your required rate of return is 9.75 percent?? (Round off to the two decimal places.)

Accepted Answer

The dividend can be calculated using the following formula:

Dividend = Required Rate of Return x Stock Price

Dividend = 0.0975 x $110.35
Dividend = $10.76 (rounded off to two decimal places)

Therefore, the correct answer is choice C, $10.76.

Question 7

Which of the following statements about preferred stock is FALSE?

Accepted Answer

Failure to pay dividends on preferred stocks does not typically result in a default. However, it may negatively impact the price of the preferred stock and the issuer's ability to issue future preferred stocks.

Question 8

Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects 7 percent growth in dividends. If the required rate of return is 15 percent, what is the current market price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The correct answer is A because the current market price of the stock is $69.41. This is calculated by using the dividend discount model, which takes into account the present value of the future dividends and the required rate of return.

Question 9

Starskeep, Inc., is a fast-growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return for such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The correct answer is A because the current price of the stock is $15.63. The formula for the current price of a stock is:P0 = D1 / (r - g)where:P0 is the current price of the stockD1 is the expected dividend one year from nowr is the required rate of returng is the constant growth rateIn this case, D1 = $1.25, r = 20%, and g = 8%. Plugging these values into the formula, we get:P0 = $1.25 / (0.20 - 0.08) = $15.63

Question 10

Grant, Inc., is a high growth stock and expects to grow at a rate of 25 percent for the next four years. It will then settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

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Question 11

Which of the following is the most typical example of a zero-growth dividend stock?

Accepted Answer

Preferred stock of a utility company is the most typical example of a zero-growth dividend stock. Utility companies are typically regulated and operate in a stable and predictable environment, allowing them to pay consistent dividends without much growth in earnings or stock price. Biotechnology, healthcare, and information technology industries are typically more volatile and have greater potential for growth, making them less likely to be considered zero-growth dividend stocks.

Question 12

Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The correct answer is A because the stock is worth $14.64 today.

Question 13

How do the secondary markets for securities differ across the four types of markets?

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Question 14

Suppose a firm's expected dividends for the next three years are as follows: D₁ = $1.10, D₂ = $1.20, and D₃ = $1.30. After three years, the firm's dividends are expected to grow at 5 percent per year. What should the current price of the firm's stock (P₀) be today if investors require a rate of return of 12 percent on the stock? (Do not round intermediate calculations. Round off final answer to the nearest $0.01)

Accepted Answer

Using the Gordon growth model, we can calculate the current price of the stock as: P₀ = (D₁ / (1+k)^1) + (D₂ / (1+k)^2) + (D₃ / (1+k)^3) + (P3 / (1+k)^3) where k is the required rate of return, P3 is the expected stock price after three years, and we are given that the dividends will grow at 5% per year after 3 years. Substituting the given values, we get: P₀ = (1.10 / (1+0.12)^1) + (1.20 / (1+0.12)^2) + (1.30 / (1+0.12)^3) + ( (1.30*(1+0.05)) / (0.12-0.05)/(1+0.12)^3 ) P₀ = $16.74 (rounded to the nearest $0.01) Therefore, the best choice is C, $16.74.

Question 15

Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the preferred stock's current market price? (Round off to the two decimal places.)

Accepted Answer

The market price of a perpetual preferred stock can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, the dividend is 5.5% of $100, which is $5.50. The required rate of return is 7.75%. Thus, the price = $5.50 / 0.0775 = $70.97.

Question 16

BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

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Question 17

A company's earnings and dividends are growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations. Round final answer to two decimal places.)

Accepted Answer

The price of the stock three years from now can be calculated using the Dividend Discount Model for a stock with constant growth, which is given by the formula: P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. First, we need to calculate the dividend three years from now (D4), since the question asks for the price three years from now, and then use D4 to find the price.The dividend three years from now (D4) can be calculated as: D4 = D0 * (1 + g)^4, where D0 is the last dividend paid.Given: D0 = $3.00, g = 8% or 0.08, r = 15% or 0.15.D4 = $3.00 * (1 + 0.08)^4 = $3.00 * 1.36049 = $4.08147.Now, to find the price three years from now, we actually need to calculate the price based on the dividend that will be paid in the fourth year, using D4 in the formula and calculating for P3 (since the dividend we've calculated is the one that will be paid at the end of the fourth year, the price we're calculating is effectively the price at the end of the third year, just before that dividend is paid).P3 = D4 / (r - g) = $4.08147 / (0.15 - 0.08) = $4.08147 / 0.07 = $58.31.Therefore, the price of the stock three years from now is $58.31.

Question 18

The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?

Accepted Answer

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Question 19

Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock's yield-to-maturity? (Round off to the nearest 0.01%)

Accepted Answer

The yield-to-maturity (YTM) can be calculated using the formula for the yield of a preferred stock, considering the quarterly dividend, current price, and par value at maturity. The calculation involves solving for the rate that equates the present value of future cash flows (dividends and par value) to the current price. The correct YTM is approximately 6.72%.

Quiz 9: Stock Valuation