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Exam 8: Stock Valuation

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Question 31

Multiple Choice

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The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock?

A) 7.42 percent
B) 7.79 percent
C) 19.67 percent
D) 20.14 percent
E) 20.86 percent

F) D) and E)
G) A) and E)

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Question 32

Multiple Choice

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Marshall Arts Studios just paid an annual dividend of $1.36 a share. The firm plans to pay annual dividends of $1.40, $1.46, and $1.58 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a 9 percent discount rate?

A) $14.08
B) $14.30
C) $16.67
D) $16.79
E) $17.46

F) C) and D)
G) A) and B)

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Question 33

Multiple Choice

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Jen's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return.

Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?

The next dividend payment by Hillside Markets will be $2.35 per share. The dividends are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells for $70 per share. What is the dividend yield?

The counter area on the floor of the NYSE where a specialist operates is called a:

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

Which one of the following statements currently applies to a NYSE broker?

A stock pays a constant annual dividend and sells for $56.10 a share. If the market rate of return on this stock is 15.85 percent, what is the amount of the next annual dividend?

Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends.

An ECN is best described as:

The secondary market is best defined by which one of the following?

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next 3 years, respectively. Beginning 4 years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth to you if you require a 12.5 percent rate of return on similar investments?

Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual dividend in perpetuity beginning 9 years from now. What is one share of this stock worth today if the market requires a 7 percent return on this investment?

Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the expected amount of the next dividend?

Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares of common stock or shares of preferred stock. What should he consider before determining the type of share he should purchase?