Test+bank+Chap008

8/9/2019 Test+bank+Chap008

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Chapter 08 - Stock Valuation

Chapter 08

Stock Valuation

Multiple Choice Questions

1. What is the model called that determines the present value of a stock based on its nextannual dividend, the dividend ro!th rate, and the applicable discount rate"#. $ero ro!th%. dividend ro!thC. capital pricin&. earnins capitali$ation'. discounted dividend

(. Which one of the follo!in is computed b) dividin next )ear*s annual dividend b) thecurrent stock price"#. )ield to maturit)%. total )ieldC. dividend )ield&. capital ains )ield'. ro!th rate

+. Which one of follo!in is the rate at !hich a stock*s price is expected to appreciate"

#. current )ield%. total returnC. dividend )ield&. capital ains )ield'. coupon rate

. Which one of the follo!in t)pes of stock is defined b) the fact that it receives no preferential treatment in respect to either dividends or bankruptc) proceedins"#. dual class

%. cumulativeC. non-cumulative&. preferred'. common

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. # compan) has t!o open seats, Seat # and Seat %, on its board of directors. here are /candidates v)in for these ( positions. here !ill be a sinle election to determine the !innerof both open seats. #s the o!ner of 100 shares of stock, )ou !ill receive one vote per sharefor each open seat. ou decide to cast all (00 of )our votes for a sinle candidate. What is this

t)pe of votin called"#. democratic%. cumulativeC. straiht&. deferred'. prox)

/. ou !ant to be on the board of directors of Wisel) oods. Since )ou are the onl)shareholder that !ill vote for )ou, )ou !ill need to o!n more than half of the outstandin

shares of stock if )ou are to be elected to the board. What is the t)pe of votin called thatre2uires this level of stock o!nership to be successfull) elected under these conditions"#. democratic%. cumulativeC. straiht&. deferred'. prox)

3. ou cannot attend the shareholder*s meetin for #lpha 4nited so )ou authori$e another

shareholder to vote on )our behalf. What is the rantin of this authorit) called"#. alterin%. cumulative votinC. straiht votin&. indenture areement'. votin b) prox)

8. What are the distributions to shareholders b) a corporation called"#. retained earnins

%. net incomeC. dividends&. capital pa)ments'. diluted profits

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5. Which one of the follo!in is a t)pe of e2uit) securit) that has a fixed dividend and a priorit) status over other e2uit) securities"#. senior bond%. debenture

C. !arrant&. common stock '. preferred stock

10. Callander 'nterprises stock is listed on 6#S. he firm is plannin to issue some ne!e2uit) shares for sale to the eneral public. his sale !ill occur in !hich one of the follo!inmarkets"#. private%. auction

C. exchane floor &. secondar)'. primar)

11. he secondar) market is best defined b) !hich one of the follo!in"#. market in !hich subordinated shares are issued and resold%. market conducted solel) b) brokersC. market dominated b) dealers&. market !here outstandin shares of stock are resold

'. market !here !arrants are offered and sold

1(. #n aent !ho maintains an inventor) from !hich he or she bu)s and sells securities iscalled a#. broker.%. trader.C. capitalist.&. principal.'. dealer.

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1+. #n aent !ho arranes a transaction bet!een a bu)er and a seller of e2uit) securities iscalled a#. broker.%. floor trader.

C. capitalist.&. principal.'. dealer.

1. he o!ner of one of the 1,+// tradin licenses for the 6S' is called a#. broker.%. member.C. aent.&. specialist.

'. dealer.

1. he person on the floor of the 6S' !ho executes bu) and sell orders on behalf ofcustomers is called a9n:#. floor trader.%. dealer.C. specialist.&. executor.'. commission broker.

1/. # market maker !ho acts as a dealer in one or more securities on the floor of the 6S' iscalled a#. floor trader.%. floor post.C. specialist.&. floor broker.'. commission broker.

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13. # floor broker on the 6S' does !hich one of the follo!in"#. supervises the commission brokers for a financial firm%. trades for his or her personal inventor)C. executes orders on behalf of a commission broker

&. maintains an inventor) and takes the role of a specialist'. is chared !ith maintainin a li2uid, orderl) market

18. #n individual on the floor of the 6S' !ho o!ns a tradin license and bu)s and sells forhis or her personal account is called a#. floor trader.%. exchane customer.C. specialist.&. floor broker.

'. market maker.

15. Which one of the follo!in is the electronic s)stem used b) the 6S' for directl)transmittin orders to specialists"#. ;C&;%. Super&;C.


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(1. he counter area on the floor of the 6S' !here a specialist operates is called a#. pit.%. hot spot.C. seat.

&. post.'. &;.

((. # securities market primaril) comprised of dealers !ho bu) and sell for their o!ninventories is referred to !hich t)pe of market"#. auction%. privateC. over-the-counter &. reional

'. electronic net!ork

(+. #n 'C6 is best described as#. an electronic net!ork !hich transmits orders directl) to the floor of the 6S'.%. the net!ork used in the primar) market for sellin ne!l) issued shares.C. the international tradin net!ork of the 6S'.&. a !ebsite that allo!s individual investors to trade directl) !ith one another.'. a computeri$ed net!ork used b) independent brokers.

(. 6ational ruckin has paid an annual dividend of =1.00 per share on its common stock for the past fifteen )ears and is expected to continue pa)in a dollar a share lon into the future.>iven this, one share of the firm*s stock is#. basicall) !orthless as it offers no ro!th potential.%. e2ual in value to the present value of =1 paid one )ear from toda).C. priced the same as a =1 perpetuit).&. valued at an assumed ro!th rate of one percent.'. !orth =1 a share in the current market.

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(. #n increase in !hich of the follo!in !ill increase the current value of a stock accordinto the dividend ro!th model"


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(8. Which one of the follo!in is an underl)in assumption of the dividend ro!th model"#. # stock has the same value to ever) investor.%. # stock*s value is e2ual to the discounted present value of the future cash flo!s !hich itenerates.

C. # stock*s value chanes in direct relation to the re2uired return.&. Stocks that pa) the same annual dividend have e2ual market values.'. he dividend ro!th rate is inversel) related to a stock*s market price.

(5. #ns!er this 2uestion based on the dividend ro!th model. 1 but reater than >(.

+1. Which one of the follo!in statements is correct"#. he capital ains )ield is the annual rate of chane in a stock*s price.%. Areferred stocks have constant ro!th dividends.C. # constant dividend stock cannot be valued usin the dividend ro!th model.&. he dividend ro!th model can be used to compute the current value of an) stock.

'. #n increase in the re2uired return !ill decrease the capital ains )ield.

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+(. Supernormal ro!th is a ro!th rate that#. is both positive and follo!s a )ear or more of neative ro!th.%. exceeds a firm*s previous )ear*s rate of ro!th.C. is enerall) constant for an infinite period of time.

&. is unsustainable over the lon term.'. applies to a sinle, abnormal )ear.

++. Which one of the follo!in represents the capital ains )ield as used in the dividendro!th model"#. &1%. &1A0C. A0&.

'. A0

+. Winston Co. has a dividend-pa)in stock !ith a total return for the )ear of -/. percent.Which one of the follo!in must be true"#. he dividend must be constant.%. he stock has a neative capital ains )ield.C. he dividend )ield must be $ero.&. he re2uired rate of return for this stock increased over the )ear.'. he firm is experiencin supernormal ro!th.

+. he t!o-stae dividend ro!th model evaluates the current price of a stock based on theassumption a stock !ill#. pa) an increasin dividend for a period of time and then cease pa)in dividends altoether.%. increase the dividend amount ever) other )ear.C. pa) a constant dividend for the first t!o 2uarters of each )ear and then increase thedividend the last t!o 2uarters of each )ear.&. ro! at a fixed rate for a period of time after !hich it !ill ro! at a different rateindefinitel).

'. pa) increasin dividends for a fixed period of time, cease pa)in dividends for a period oftime, and then commence pa)in increasin dividends for an indefinite period of time.

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+/. Which one of the follo!in sets of dividend pa)ments best meets the definition of t!o-stae ro!th as it applies to the t!o-stae dividend ro!th model"#. no dividends for )ears, then increasin dividends forever %. =1 per share annual dividend for ( )ears, then =1.( annual dividends forever

C. decreasin dividends for / )ears follo!ed b) one final li2uidatin dividend pa)ment&. dividends pa)ments !hich increase b) (, +, and percent respectivel) for + )ears follo!ed b) a constant dividend thereafter '. dividend pa)ments !hich increase b) 10 percent per )ear for )ears follo!ed b)dividends !hich increase b) + percent annuall) thereafter

+3. Which one of the follo!in rihts is never directl) ranted to all shareholders of a publicl)-held corporation"#. electin the board of directors

%. receivin a distribution of compan) profitsC. votin either for or aainst a proposed merer or ac2uisition&. determinin the amount of the dividend to be paid per share'. havin first chance to purchase an) ne! e2uit) shares that ma) be offered

+8. Een o!ns +0 shares of stock in &elta ashions and !ants to !in a seat on the board ofdirectors. he firm has a total of 100 shares of stock outstandin. 'ach share receives onevote. Aresentl), the compan) is votin to elect three ne! directors. Which one of thefollo!in statements must be true iven this information"

#. Deardless of the votin procedure, Een does not o!n enouh shares to ain a seat on the board.%.


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+5. he %lue Farlin is o!ned b) a roup of shareholders !ho all vote independentl) and!ho all !ant personal control over the firm. What is the minimum percentae of theoutstandin shares one of these shareholders must o!n if he or she is to ain personal controlover this firm iven that the firm uses straiht votin"

#. 13 percent%. (0 percent plus one voteC. ( percent plus one vote&. 0 percent plus one vote'. 1 percent

0. Chemical Fines has ,000 shareholders and is preparin to elect t!o ne! board members.

ou do not o!n enouh shares to personall) control the elections but are determined to oust

the current leadership. Gike!ise, no other sinle shareholder o!ns sufficient shares to personall) control the outcome of the election. Which one of the follo!in is the most likel)outcome of this situation iven that some shareholders are happ) !ith the existinmanaement"#. neotiated settlement !here each side is ranted control over one of the open seats%. protracted leal battle over control of the board of directorsC. arbitrated settlement !here the arbitrator determines !ho !ill be elected to the board&. control of the board decided !ithout )our influence'. prox) fiht for control of the board

1. ?ard) Gumber has a capital structure !hich includes bonds, preferred stock, and commonstock.Which of the follo!in rihts have most likel) been ranted to the preferred shareholders"


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(. %oston ree Aress has a dividend polic) !hereb) the firm pa)s a constant annual dividendof =(.0 per share of common stock. he firm has 1,000 shares of stock outstandin. hecompan)

#. must al!a)s sho! a current liabilit) of =(,00, 9=(.0 × 1,000:, for dividends pa)able.

%. must still declare each dividend before it becomes an actual compan) liabilit).C. is obliated to pa) =(.0 per share each )ear in perpetuit).&. !ill be declared in default if it does not pa) at least =(.0 per share per )ear on a timel) basis.'. has a liabilit) that must be paid at a later date should the compan) miss pa)in an annualdividend pa)ment.

+. Which one of the follo!in statements related to corporate dividends is correct"#. &ividends are nontaxable income to shareholders.

%. &ividends reduce the taxable income of the corporation.C. he Chief 'xecutive ;fficer of a corporation is responsible for declarin dividends.&. he Chief inancial ;fficer of a corporation determines the amount of dividend to be paid.'. Corporate shareholders ma) receive a tax break on a portion of their dividend income.

. Which one of these statements related to preferred stock is correct"#. Areferred shareholders normall) receive one vote per share of stock o!ned.%. Areferred shareholders determine the outcome of an) election that involves a prox) fiht.C. Areferred shareholders are considered to be the residual o!ners of a corporation.

&. Areferred stock normall) has a stated li2uidatin value of =1,000 per share.'. Cumulative preferred shares are more valuable than comparable non-cumulative shares.

. ou o!n one share of a cumulative preferred stock !hich pa)s 2uarterl) dividends. hefirm has recentl) suffered some financial setbacks and has failed to pa) the last t!odividends. ?o!ever, ne! fundin has been arraned and the firm intends to restore alldividends, both common and preferred, this 2uarter. #s a preferred shareholder, )ou shouldexpect to receive the e2uivalent of @@@@ 2uarter9s: of dividends !hen the next dividend is paid.

#. 0%. 1C. (&. +'. either 1, (, or +

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/. Which of the follo!in features do preferred shareholders and bondholders fre2uentl)have in common"


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0. Which one of the follo!in statements currentl) applies to a 6S' broker"#. o!ns a HseatH on the exchane%. bu)s at the bid priceC. remains at his or her specified post

&. matches customer bu) and sell orders'. trades for his or her personal account

1. Who o!ns the 6S'"#. 6S' members%. specialistsC. dealers&. floor brokers'. shareholders

(. Which one of the follo!in pla)ers on the floor of the 6S' can be likened to part-timehelp because the) are called to dut) onl) !hen others are full) emplo)ed"#. floor trader %. specialistC. dealer &. floor broker '. commission broker

+. Which one of the follo!in statements applies to 6#S"#. a partner !ith the Gondon exchane%. exchane floor is located in ChicaoC. sinle market maker for each listed securit)&. broker*s market'. comprised of three separate markets

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. ou o!n /00 shares of a 6#S listed stock that )ou !ish to sell. Which of thefollo!in are options available to )ou for this purpose"


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3. Filler %rothers ?ard!are paid an annual dividend of =1.1 per share last month. oda),the compan) announced that future dividends !ill be increasin b) (./ percent annuall).


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/0. ree Fotion 'nterprises paid a =(.(0 per share annual dividend last !eek. &ividends areexpected to increase b) +.3 percent annuall). What is one share of this stock !orth to )outoda) if )our re2uired rate of return is 1 percent"#. =15.0/

%. =15.+0C. =15./&. =(0.(5'. =(0.5

/1. 4pper Crust %akers Just paid an annual dividend of =(.80 a share and is expected toincrease that amount b) percent per )ear.


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/+. Sho! %oat &inner heatres has paid annual dividends of =0.+(, =0.8, and =0./0 a shareover the past three )ears, respectivel). he compan) no! predicts that it !ill maintain aconstant dividend since its business has leveled off and sales are expected to remain relativel)flat. >iven the lack of future ro!th, )ou !ill onl) bu) this stock if )ou can earn at least a 1/

percent rate of return. What is the maximum amount )ou are !illin to pa) for one share ofthis stock toda)"#. =+.+%. =+.3C. =.+&. =./5'. =.8(

/. he common stock of #uto &eliveries sells for =(8.1/ a share. he stock is expected to

pa) =1.+ per share next )ear !hen the annual dividend is distributed. he firm hasestablished a pattern of increasin its dividends b) + percent annuall) and expects to continuedoin so. What is the market rate of return on this stock"#. 3.( percent%. 3.35 percentC. 15./3 percent&. (0.1 percent'. (0.8/ percent

/. he current dividend )ield on Cla)ton*s Fetals common stock is (. percent. hecompan) Just paid a =1.8 annual dividend and announced plans to pa) =1. next )ear. hedividend ro!th rate is expected to remain constant at the current level. What is the re2uiredrate of return on this stock"#. /. percent%. /.8( percentC. 3.08 percent&. 3.+5 percent'. 3.3 percent

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//. 6orthern >as recentl) paid a =(.80 annual dividend on its common stock. his dividendincreases at an averae rate of +.8 percent per )ear. he stock is currentl) sellin for =(/.51 ashare. What is the market rate of return"#. 1+.88 percent

%. 1.0+ percentC. 1.(1 percent&. 1.+3 percent'. 1./0 percent

/3. &enver Shoppes !ill pa) an annual dividend of =1./ a share next )ear !ith futuredividends increasin b) .( percent annuall). What is the market rate of return if the stock iscurrentl) sellin for =+8.50 a share"#. /. percent

%. 3.1+ percentC. 3./ percent&. 3.5 percent'. 8.(5 percent

/8. >reat Gakes ?ealth Care common stock offers an expected total return of 5.( percent. helast annual dividend !as =(.10 a share. &ividends increase at a constant (./ percent per )ear.What is the dividend )ield"#. +.3 percent

%. .(0 percentC. . percent&. .( percent'. /./0 percent

/5. 'lectronics,


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30. Do)*s Weldin Supplies common stock sells for =+8 a share and pa)s an annual dividendthat increases b) + percent annuall). he market rate of return on this stock is 8.(0 percent.What is the amount of the last dividend paid"#. =1.80

%. =1.8/C. =1.5(&. =1.58'. =(.10

31. &oulass >ardens pa)s an annual dividend that is expected to increase b) .1 percent per)ear. he stock commands a market rate of return of 1(./ percent and sells for =(.50 a share.What is the expected amount of the next dividend"#. =(.0+

%. =(.1(C. =+.13&. =(.(0'. =(.(8

3(. #tlas Fines has adopted a polic) of increasin the annual dividend on its common stockat a constant rate of (.3 percent annuall). he firm Just paid an annual dividend of =1./3.What !ill the dividend be six )ears from no!"#. =1.88

%. =1.5(C. =1.53&. =(.0('. =(.0

3+. # stock pa)s a constant annual dividend and sells for =/.10 a share.


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3. ou !ant to purchase some shares of >reen World stock but need a 1 percent rate ofreturn to compensate for the perceived risk of such o!nership. What is the maximum )ou are!illin to spend per share to bu) this stock if the compan) pa)s a constant =0.50 annualdividend per share"

#. =.0%. =/.00C. =/.50&. =3.(0'. =3.80

3. ?ome Cannin Aroducts common stock sells for =.5/ a share and has a market rate ofreturn of 1(.8 percent. he compan) Just paid an annual dividend of =1.0 per share. What isthe dividend ro!th rate"

#. 8.(5 percent%. 8. percentC. 5.(+ percent&. 5./3 percent'. 10.( percent

3/. Winter ime #dventures is oin to pa) an annual dividend of =(.8/ a share on itscommon stock next )ear. his )ear, the compan) paid a dividend of =(.3 a share. hecompan) adheres to a constant rate of ro!th dividend polic). What !ill one share of this

common stock be !orth five )ears from no! if the applicable discount rate is 11.3 percent"#. =+.%. =+.83C. =.1&. =.15'. =3.00

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33. ?ihto!er Aharmac) Just paid a =+.10 annual dividend. he compan) has a polic) ofincreasin the dividend b) +.8 percent annuall). ou !ould like to purchase 100 shares ofstock in this firm but reali$e that )ou !ill not have the funds to do so for another four )ears.


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80. Combined Communications is a ne! firm in a rapidl) ro!in industr). he compan) is plannin on increasin its annual dividend b) 1 percent a )ear for the next )ears and thendecreasin the ro!th rate to +. percent per )ear. he compan) Just paid its annual dividendin the amount of =0.(0 per share. What is the current value of one share of this stock if the

re2uired rate of return is 1. percent"#. =1.8(%. =(.0C. =(.5&. =(.31'. =+.0

81. KG #irlines paid an annual dividend of =1.( a share last month. he compan) is planninon pa)in =1.0, =1.3, and =1.80 a share over the next + )ears, respectivel). #fter that, the

dividend !ill be constant at =( per share per )ear. What is the market price of this stock if themarket rate of return is 10. percent"#. =1.58%. =1/.03C. =18.(&. =(1.1/'. =(.10

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8+. &iets or ou announced toda) that it !ill bein pa)in annual dividends next )ear. hefirst dividend !ill be =0.1( a share. he follo!in dividends !ill be =0.1, =0.(0, =0.0, and=0./0 a share annuall) for the follo!in )ears, respectivel). #fter that, dividends are proJected to increase b) percent per )ear. ?o! much are )ou !illin to pa) to bu) one share

of this stock toda) if )our desired rate of return is 8. percent"#. =5./3%. =5.5C. =10.+8&. =10.0'. =10.8/

8. Cr)stal >lass recentl) paid =+./0 as an annual dividend. uture dividends are proJected at=+.80, =.10, and =.( over the next + )ears, respectivel). %einnin )ears from no!, the

dividend is expected to increase b) +.( percent annuall). What is one share of this stock!orth to )ou if )ou re2uire a 1(. percent rate of return on similar investments"#. =(.5(%. =+.0C. =.1(&. =.88'. =/.0

8. Ganle) 'nterprises pa)s a constant dividend of =0./0 a share. he compan) announced

toda) that it !ill continue to pa) the dividend for another ( )ears after !hich time alldividends !ill cease. What is one share of this stock !orth toda) if the re2uired rate of returnis 1/. percent"#. =0.5(%. =0.5/C. =1.0&. =1.05'. =1.(0

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8/. ester)ear Aroductions pa)s no dividend at the present time. he compan) plans to start pa)in an annual dividend in the amount of =0.0 a share for t!o )ears commencin four)ears from toda). #fter that time, the compan) plans on pa)in a constant =0.3 a shareannual dividend indefinitel). ?o! much are )ou !illin to pa) to bu) a share of this stock

toda) if )our re2uired return is 11./ percent"#. =+.38%. =.((C. =.+3&. =.31'. =.58

83. S!eatshirts 4nlimited is do!nsi$in. he compan) paid a =(.80 annual dividend last )ear.he compan) has announced plans to lo!er the dividend b) ( percent each )ear. ;nce the

dividend amount becomes $ero, the compan) !ill cease all dividends and o out of business.ou have a re2uired rate of return of 1. percent on this particular stock iven the compan)*ssituation. What are )our shares in this firm !orth toda) on a per share basis"#. =.15%. =/.51C. =8./8&. =15.(5'. =((.11

88. &exter Fetals, paid its first annual dividend )esterda) in the amount of =0.18 a share. hecompan) plans to double each annual dividend pa)ment for the next + )ears. #fter that time,it plans to pa) =1.( a share for ( )ears than then pa) a constant dividend of =1./0 per shareindefinitel). What is one share of this stock !orth toda) if the market rate of return on similarsecurities is 10.( percent"#. =1(.+(%. =1(.33C. =1+.(0&. =1.(/'. =1.35

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85. Farshall #rts Studios Just paid an annual dividend of =1.+/ a share. he firm plans to pa)annual dividends of =1.0, =1./, and =1.8 over the next + )ears, respectivel). #fter thattime, the dividends !ill be held constant at =1./0 per share. What is this stock !orth toda) ata 5 percent discount rate"

#. =1.08%. =1.+0C. =1/./3&. =1/.35'. =13./

50. ?ome Care Aroviders is pa)in an annual dividend of =1.10 ever) other )ear. he lastdividend !as paid t!o )ears ao. he firm !ill continue this polic) until + more dividend pa)ments have been paid. ;ne )ear after the last dividend normal pa)ment, the compan)

plans to pa) a final li2uidatin dividend of =0 per share. What is the current market value ofthis stock if the re2uired return is 13 percent"#. =18.5(%. =(0.3C. =(+.1/&. =(.1'. =(.+

51. Gast )ear, ?ansen &eliver) paid an annual dividend of =+.(0 per share. he compan) has

been reducin the dividends b) 10 percent annuall). ?o! much are )ou !illin to pa) to purchase stock in this compan) if )our re2uired rate of return is 11. percent"#. =1.5(%. =3.83C. =1+.0&. =(1.1/'. =(.08

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5(. %eatrice Farkets is expectin a period of intense ro!th and has decided to retain more of its earnins to help finance that ro!th. #s a result, it is oin to reduce its annual dividend b) +0 percent a )ear for the next ( )ears. #fter that, it !ill maintain a constant dividend of=(.0 a share. Gast )ear, the compan) paid =+./0 as the annual dividend per share. What is the

market value of this stock if the re2uired rate of return is 1. percent"#. =1./+%. =1/.30C. =18.08&. =15./1'. =(1.(+

5+. %onnie*s


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5. he preferred stock of Dail Gines,


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55. 4sin the dividend ro!th model, explain !h) a firm !ould be hesitant to reduce thero!th rate of its dividends.

100. Kelle) !ants to purchase shares in Classic Kars,


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10+. 'xplain the primar) chane that occurred in the structure of the 6S' in (00/ and ho!that chane affected the exchane members.


10. Eefferson Fills Just paid a dividend of =1./ per share on its stock. he dividends areexpected to ro! at a constant rate of 8 percent per )ear, indefinitel). What !ill the price ofthis stock be in 3 )ears if investors re2uire a 1 percent rate of return"#. =(8.18%. =+(.0C. =+3./&. =1.('. =+.++

10. he next dividend pa)ment b) ?illside Farkets !ill be =(.+ per share. he dividendsare anticipated to maintain a . percent ro!th rate forever. he stock currentl) sells for =30 per share. What is the dividend )ield"#. +.(0 percent%. +.+/ percentC. +. percent&. .0 percent'. .81 percent

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10/. he Stiller Corporation !ill pa) a =+.80 per share dividend next )ear. he compan) pledes to increase its dividend b) (. percent indefinitel). ?o! much are )ou !illin to pa)to purchase this compan)*s stock toda) if )ou re2uire a /.5 percent return on )ourinvestment"

#. =.03%. =/+.05C. =3(.((&. =38.3'. =8.

103. Suppose )ou kno! a compan)*s stock currentl) sells for =50 per share and the re2uiredreturn on the stock is 10 percent. ou also kno! that the total return on the stock is evenl)divided bet!een a capital ains )ield and a dividend )ield. What is the current dividend if it*s

the compan)*s polic) to al!a)s maintain a constant ro!th rate in its dividends"#. =.18%. =.(5C. =.+3&. =.0'. =./

108. Whistle Stop rains pa)s a constant =1/ dividend on its stock. he compan) !illmaintain this dividend for the next 1 )ears and !ill then cease pa)in dividends forever.

What is the current price per share if the re2uired return on this stock is 1 percent"#. =33.38%. =8(.8C. =51.5&. =10/./3'. =11(.00

105. Forristo!n


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110. he armer*s Farket Just paid an annual dividend of = on its stock. he ro!th rate individends is expected to be a constant percent per )ear indefinitel).


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11+. Een*s ashions is ro!in 2uickl). &ividends are expected to ro! at a (( percent ratefor the next + )ears, !ith the ro!th rate fallin off to a constant 8 percent thereafter. here2uired return is 1( percent and the compan) Just paid a =+.80 annual dividend. What is thecurrent share price"

#. =1(8.5/%. =1+1.11C. =1/.13&. =18.83'. =1(.(0

11. ?ard!oods,


34/94


35/94


Chapter 08 Stock Valuation #ns!er Ke)


1. What is the model called that determines the present value of a stock based on its nextannual dividend, the dividend ro!th rate, and the applicable discount rate"#. $ero ro!thB. dividend ro!thC. capital pricin&. earnins capitali$ation'. discounted dividend

Defer to section 8.1

AACSB: N/A

Difficulty: Basic

Learning Objective: 8-1

Section: 81!o"ic: Divi#en# gro$t% &o#el

(. Which one of the follo!in is computed b) dividin next )ear*s annual dividend b) the

current stock price"#. )ield to maturit)%. total )ieldC. dividend )ield&. capital ains )ield'. ro!th rate


AACSB: N/A

Difficulty: Basic Learning Objective: 8-1

Section: 81!o"ic: Divi#en# yiel#

8-+


36/94


+. Which one of follo!in is the rate at !hich a stock*s price is expected to appreciate"#. current )ield%. total returnC. dividend )ield

D. capital ains )ield'. coupon rate


AACSB: N/A Difficulty: Basic


Section: 81

!o"ic: Ca"ital gains yiel#

. Which one of the follo!in t)pes of stock is defined b) the fact that it receives no preferential treatment in respect to either dividends or bankruptc) proceedins"#. dual class%. cumulativeC. non-cumulative&. preferredE. common

Defer to section 8.(

AACSB: N/A

Difficulty: Basic


Section: 8'

!o"ic: Co&&on stoc(

8-+/


37/94


. # compan) has t!o open seats, Seat # and Seat %, on its board of directors. here are /candidates v)in for these ( positions. here !ill be a sinle election to determine the !innerof both open seats. #s the o!ner of 100 shares of stock, )ou !ill receive one vote per sharefor each open seat. ou decide to cast all (00 of )our votes for a sinle candidate. What is this

t)pe of votin called"#. democraticB. cumulativeC. straiht&. deferred'. prox)


AACSB: N/A

Difficulty: Basic Learning Objective: 8-'

Section: 8'

!o"ic: Cu&ulative voting

/. ou !ant to be on the board of directors of Wisel) oods. Since )ou are the onl)shareholder that !ill vote for )ou, )ou !ill need to o!n more than half of the outstandinshares of stock if )ou are to be elected to the board. What is the t)pe of votin called thatre2uires this level of stock o!nership to be successfull) elected under these conditions"#. democratic%. cumulative

C. straiht&. deferred'. prox)



Learning Objective: 8-'

Section: 8'

!o"ic: Straig%t voting

8-+3


38/94


3. ou cannot attend the shareholder*s meetin for #lpha 4nited so )ou authori$e anothershareholder to vote on )our behalf. What is the rantin of this authorit) called"#. alterin%. cumulative votin

C. straiht votin&. indenture areementE. votin b) prox)


AACSB: N/A

Difficulty: Basic


Section: 8'!o"ic: )ro*y

8. What are the distributions to shareholders b) a corporation called"#. retained earnins%. net incomeC. dividends&. capital pa)ments'. diluted profits


AACSB: N/A

Difficulty: Basic


Section: 8'

!o"ic: Divi#en#s

8-+8


39/94


5. Which one of the follo!in is a t)pe of e2uit) securit) that has a fixed dividend and a priorit) status over other e2uit) securities"#. senior bond%. debenture

C. !arrant&. common stock E. preferred stock


AACSB: N/A

Difficulty: Basic


Section: 8'!o"ic: )referre# stoc(

10. Callander 'nterprises stock is listed on 6#S. he firm is plannin to issue some ne!e2uit) shares for sale to the eneral public. his sale !ill occur in !hich one of the follo!inmarkets"#. private%. auctionC. exchane floor &. secondar)E. primar)

Defer to section 8.+

AACSB: N/A

Difficulty: Basic Learning Objective: 8-+

Section: 8+

!o"ic: )ri&ary &ar(et

8-+5


40/94


11. he secondar) market is best defined b) !hich one of the follo!in"#. market in !hich subordinated shares are issued and resold%. market conducted solel) b) brokersC. market dominated b) dealers

D. market !here outstandin shares of stock are resold'. market !here !arrants are offered and sold



Learning Objective: 8-+

Section: 8+

!o"ic: Secon#ary &ar(et

1(. #n aent !ho maintains an inventor) from !hich he or she bu)s and sells securities iscalled a#. broker.%. trader.C. capitalist.&. principal.E. dealer.


AACSB: N/A

Difficulty: Basic


Section: 8+

!o"ic: Dealer

8-0


41/94


1+. #n aent !ho arranes a transaction bet!een a bu)er and a seller of e2uit) securities iscalled aA. broker.%. floor trader.

C. capitalist.&. principal.'. dealer.


AACSB: N/A

Difficulty: Basic


Section: 8+!o"ic: Bro(er

1. he o!ner of one of the 1,+// tradin licenses for the 6S' is called a#. broker.B. member.C. aent.&. specialist.'. dealer.


AACSB: N/A

Difficulty: Basic


Section: 8+

!o"ic: ,e&ber

8-1


42/94


1. he person on the floor of the 6S' !ho executes bu) and sell orders on behalf ofcustomers is called a9n:#. floor trader.%. dealer.

C. specialist.&. executor.E. commission broker.


AACSB: N/A

Difficulty: Basic


Section: 8+!o"ic: Co&&ission bro(er

1/. # market maker !ho acts as a dealer in one or more securities on the floor of the 6S' iscalled a#. floor trader.%. floor post.C. specialist.&. floor broker.'. commission broker.


AACSB: N/A

Difficulty: Basic


Section: 8+!o"ic: S"ecialist

8-(


43/94


13. # floor broker on the 6S' does !hich one of the follo!in"#. supervises the commission brokers for a financial firm%. trades for his or her personal inventor)C. executes orders on behalf of a commission broker

&. maintains an inventor) and takes the role of a specialist'. is chared !ith maintainin a li2uid, orderl) market




Section: 8+

!o"ic: loor bro(er

18. #n individual on the floor of the 6S' !ho o!ns a tradin license and bu)s and sells forhis or her personal account is called aA. floor trader.%. exchane customer.C. specialist.&. floor broker.'. market maker.


AACSB: N/A

Difficulty: Basic


Section: 8+

!o"ic: loor tra#er

8-+


44/94


15. Which one of the follo!in is the electronic s)stem used b) the 6S' for directl)transmittin orders to specialists"#. ;C&;B. Super&;

C.


45/94


(1. he counter area on the floor of the 6S' !here a specialist operates is called a#. pit.%. hot spot.C. seat.

D. post.'. &;.




Section: 8+

!o"ic: S"ecialist.s "ost

((. # securities market primaril) comprised of dealers !ho bu) and sell for their o!ninventories is referred to !hich t)pe of market"#. auction%. privateC. over-the-counter &. reional'. electronic net!ork


AACSB: N/A

Difficulty: Basic


Section: 8+

!o"ic: Over-t%e-counter &ar(et

8-


46/94


(+. #n 'C6 is best described as#. an electronic net!ork !hich transmits orders directl) to the floor of the 6S'.%. the net!ork used in the primar) market for sellin ne!l) issued shares.C. the international tradin net!ork of the 6S'.

D. a !ebsite that allo!s individual investors to trade directl) !ith one another.'. a computeri$ed net!ork used b) independent brokers.




Section: 8+

!o"ic: lectronic co&&unications net$or(

(. 6ational ruckin has paid an annual dividend of =1.00 per share on its common stock for the past fifteen )ears and is expected to continue pa)in a dollar a share lon into the future.>iven this, one share of the firm*s stock is#. basicall) !orthless as it offers no ro!th potential.%. e2ual in value to the present value of =1 paid one )ear from toda).C. priced the same as a =1 perpetuit).&. valued at an assumed ro!th rate of one percent.'. !orth =1 a share in the current market.


AACSB: N/A

Difficulty: Basic


Section: 81!o"ic: )er"etuity

8-/


47/94


48/94


(3. he dividend ro!th model


49/94


(5. #ns!er this 2uestion based on the dividend ro!th model. 1 but reater than >(.




Section: 81

!o"ic: !$o-stage gro$t%

8-5


50/94


+1. Which one of the follo!in statements is correct"A. he capital ains )ield is the annual rate of chane in a stock*s price.%. Areferred stocks have constant ro!th dividends.C. # constant dividend stock cannot be valued usin the dividend ro!th model.

&. he dividend ro!th model can be used to compute the current value of an) stock.'. #n increase in the re2uired return !ill decrease the capital ains )ield.

Defer to sections 8.1 and 8.(

AACSB: N/A Difficulty: 0nter&e#iate


Section: 81 an# 8'

!o"ic: Stoc( features

+(. Supernormal ro!th is a ro!th rate that#. is both positive and follo!s a )ear or more of neative ro!th.%. exceeds a firm*s previous )ear*s rate of ro!th.C. is enerall) constant for an infinite period of time.D. is unsustainable over the lon term.'. applies to a sinle, abnormal )ear.


AACSB: N/A


Section: 81

!o"ic: Su"ernor&al gro$t%

8-0


51/94


++. Which one of the follo!in represents the capital ains )ield as used in the dividendro!th model"#. &1%. &1A0

C. A0D. '. A0


AACSB: N/A

Difficulty: 0nter&e#iate


Section: 81!o"ic: Ca"ital gains yiel#

+. Winston Co. has a dividend-pa)in stock !ith a total return for the )ear of -/. percent.Which one of the follo!in must be true"#. he dividend must be constant.B. he stock has a neative capital ains )ield.C. he dividend )ield must be $ero.&. he re2uired rate of return for this stock increased over the )ear.'. he firm is experiencin supernormal ro!th.


AACSB: N/A



Section: 81!o"ic: !otal return

8-1


52/94


+. he t!o-stae dividend ro!th model evaluates the current price of a stock based on theassumption a stock !ill#. pa) an increasin dividend for a period of time and then cease pa)in dividends altoether.%. increase the dividend amount ever) other )ear.

C. pa) a constant dividend for the first t!o 2uarters of each )ear and then increase thedividend the last t!o 2uarters of each )ear.D. ro! at a fixed rate for a period of time after !hich it !ill ro! at a different rateindefinitel).'. pa) increasin dividends for a fixed period of time, cease pa)in dividends for a period oftime, and then commence pa)in increasin dividends for an indefinite period of time.


AACSB: N/A


Section: 81

!o"ic: !$o-stage #ivi#en# gro$t%

+/. Which one of the follo!in sets of dividend pa)ments best meets the definition of t!o-stae ro!th as it applies to the t!o-stae dividend ro!th model"#. no dividends for )ears, then increasin dividends forever %. =1 per share annual dividend for ( )ears, then =1.( annual dividends forever C. decreasin dividends for / )ears follo!ed b) one final li2uidatin dividend pa)ment&. dividends pa)ments !hich increase b) (, +, and percent respectivel) for + )ears follo!ed

b) a constant dividend thereafter E. dividend pa)ments !hich increase b) 10 percent per )ear for )ears follo!ed b)dividends !hich increase b) + percent annuall) thereafter




Section: 81

!o"ic: !$o-stage #ivi#en# gro$t%

8-(


53/94


+3. Which one of the follo!in rihts is never directl) ranted to all shareholders of a publicl)-held corporation"#. electin the board of directors%. receivin a distribution of compan) profits

C. votin either for or aainst a proposed merer or ac2uisitionD. determinin the amount of the dividend to be paid per share'. havin first chance to purchase an) ne! e2uit) shares that ma) be offered


AACSB: N/A

Difficulty: Basic


Section: 8'!o"ic: S%are%ol#er rig%ts

+8. Een o!ns +0 shares of stock in &elta ashions and !ants to !in a seat on the board ofdirectors. he firm has a total of 100 shares of stock outstandin. 'ach share receives onevote. Aresentl), the compan) is votin to elect three ne! directors. Which one of thefollo!in statements must be true iven this information"#. Deardless of the votin procedure, Een does not o!n enouh shares to ain a seat on the board.%.


54/94


55/94


1. ?ard) Gumber has a capital structure !hich includes bonds, preferred stock, and commonstock.Which of the follo!in rihts have most likel) been ranted to the preferred shareholders"


56/94


+. Which one of the follo!in statements related to corporate dividends is correct"#. &ividends are nontaxable income to shareholders.%. &ividends reduce the taxable income of the corporation.C. he Chief 'xecutive ;fficer of a corporation is responsible for declarin dividends.

&. he Chief inancial ;fficer of a corporation determines the amount of dividend to be paid.E. Corporate shareholders ma) receive a tax break on a portion of their dividend income.




Section: 8'

!o"ic: Divi#en# features

. Which one of these statements related to preferred stock is correct"#. Areferred shareholders normall) receive one vote per share of stock o!ned.%. Areferred shareholders determine the outcome of an) election that involves a prox) fiht.C. Areferred shareholders are considered to be the residual o!ners of a corporation.&. Areferred stock normall) has a stated li2uidatin value of =1,000 per share.E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.


AACSB: N/A

Difficulty: Basic Learning Objective: 8-'

Section: 8'

!o"ic: )referre# stoc(

8-/


57/94


. ou o!n one share of a cumulative preferred stock !hich pa)s 2uarterl) dividends. hefirm has recentl) suffered some financial setbacks and has failed to pa) the last t!odividends. ?o!ever, ne! fundin has been arraned and the firm intends to restore alldividends, both common and preferred, this 2uarter. #s a preferred shareholder, )ou should

expect to receive the e2uivalent of @@@@ 2uarter9s: of dividends !hen the next dividend is paid.#. 0%. 1C. (D. +'. either 1, (, or +


AACSB: N/A

Difficulty: Basic

Learning Objective: 8-'Section: 8'

!o"ic: Cu&ulative "referre# stoc(

/. Which of the follo!in features do preferred shareholders and bondholders fre2uentl)have in common"


58/94


3. Which of the follo!in appl) to a specialist !ho trades on the floor of the 6S'"


59/94


5. Which one of the follo!in transactions occurs in the primar) market"#. purchase of 00 shares of >' stock from a current shareholder %. ift of 100 shares of stock to a charitable orani$ationC. ift of (00 shares of stock b) a mother to her dauhter

D. a purchase of ne!l) issued stock from #I'. ' stock




Section: 8+

!o"ic: )ri&ary &ar(et

0. Which one of the follo!in statements currentl) applies to a 6S' broker"#. o!ns a HseatH on the exchane%. bu)s at the bid priceC. remains at his or her specified postD. matches customer bu) and sell orders'. trades for his or her personal account


AACSB: N/A

Difficulty: Basic Learning Objective: 8-+

Section: 8+

!o"ic: N2S bro(er

8-5


60/94


1. Who o!ns the 6S'"#. 6S' members%. specialistsC. dealers

&. floor brokersE. shareholders




Section: 8+

!o"ic: N2S o$ners%i"

(. Which one of the follo!in pla)ers on the floor of the 6S' can be likened to part-timehelp because the) are called to dut) onl) !hen others are full) emplo)ed"#. floor trader %. specialistC. dealer D. floor broker '. commission broker


AACSB: N/A

Difficulty: Basic


Section: 8+

!o"ic: loor bro(er

8-/0


61/94


+. Which one of the follo!in statements applies to 6#S"#. a partner !ith the Gondon exchane%. exchane floor is located in ChicaoC. sinle market maker for each listed securit)

&. broker*s marketE. comprised of three separate markets




Section: 8+

!o"ic: NASDA3

. ou o!n /00 shares of a 6#S listed stock that )ou !ish to sell. Which of thefollo!in are options available to )ou for this purpose"


62/94


. ou are the sole shareholder of a small corporation. Aresentl), )ou !ish to diversif) )ourholdins and thus !ant to sell a portion of )our shares but do not !ant to incur the costsassociated !ith S'C filins. Which one of the follo!in markets, if an), miht be conduciveto this sale"

#. 6#S%. ;C%%C. Aink Sheets&. 6S''. 6one of the above



Learning Objective: 8-+Section: 8+

!o"ic: )in( S%eets

/. ou are an accountant and have been anal)$in the financial statements of 'uro AlaceFarkets, !hich is a forein retailer. While the firm*s financials are not prepared accordin to>##A, )ou have still been able to understand the firm*s accountin practices and feel that thisfirm has a briht future. ;n !hich one of the follo!in 4.S. markets, if an), miht )ou beable to purchase shares in this firm"#. 6S'%. 6#S

C. ;C%%D. Aink Sheets'. 6o 4.S. market !ill list this forein securit).




Section: 8+

!o"ic: )in( S%eets

8-/(


63/94


3. Filler %rothers ?ard!are paid an annual dividend of =1.1 per share last month. oda),the compan) announced that future dividends !ill be increasin b) (./ percent annuall).


64/94


5. ?o! much are )ou !illin to pa) for one share of Eumbo rout stock if the compan) Just paid a =0.30 annual dividend, the dividends increase b) 1./ percent annuall), and )ou re2uirea 10 percent rate of return"#. =8.(5

%. =8.++C. =8.3&. =8.+'. =8.5

AACSB: Analytic Difficulty: Basic


Section: 81

!o"ic: Stoc( "rice

/0. ree Fotion 'nterprises paid a =(.(0 per share annual dividend last !eek. &ividends areexpected to increase b) +.3 percent annuall). What is one share of this stock !orth to )outoda) if )our re2uired rate of return is 1 percent"#. =15.0/%. =15.+0C. =15./D. =(0.(5

'. =(0.5



Section: 81

!o"ic: Stoc( "rice

8-/


65/94


/1. 4pper Crust %akers Just paid an annual dividend of =(.80 a share and is expected toincrease that amount b) percent per )ear.


66/94


/+. Sho! %oat &inner heatres has paid annual dividends of =0.+(, =0.8, and =0./0 a shareover the past three )ears, respectivel). he compan) no! predicts that it !ill maintain aconstant dividend since its business has leveled off and sales are expected to remain relativel)flat. >iven the lack of future ro!th, )ou !ill onl) bu) this stock if )ou can earn at least a 1/

percent rate of return. What is the maximum amount )ou are !illin to pa) for one share ofthis stock toda)"#. =+.+B. =+.3C. =.+&. =./5'. =.8(



Section: 81

!o"ic: Constant #ivi#en#

/. he common stock of #uto &eliveries sells for =(8.1/ a share. he stock is expected to pa) =1.+ per share next )ear !hen the annual dividend is distributed. he firm hasestablished a pattern of increasin its dividends b) + percent annuall) and expects to continuedoin so. What is the market rate of return on this stock"

#. 3.( percentB. 3.35 percentC. 15./3 percent&. (0.1 percent'. (0.8/ percent



Section: 81!o"ic: 4e5uire# return

8-//


67/94


/. he current dividend )ield on Cla)ton*s Fetals common stock is (. percent. hecompan) Just paid a =1.8 annual dividend and announced plans to pa) =1. next )ear. hedividend ro!th rate is expected to remain constant at the current level. What is the re2uiredrate of return on this stock"

A. /. percent%. /.8( percentC. 3.08 percent&. 3.+5 percent'. 3.3 percent

AACSB: Analytic



Section: 81!o"ic: 4e5uire# return

//. 6orthern >as recentl) paid a =(.80 annual dividend on its common stock. his dividendincreases at an averae rate of +.8 percent per )ear. he stock is currentl) sellin for =(/.51 ashare. What is the market rate of return"#. 1+.88 percent%. 1.0+ percentC. 1.(1 percent&. 1.+3 percentE. 1./0 percent

AACSB: Analytic

Difficulty: Basic


Section: 81

!o"ic: 4e5uire# return

8-/3


68/94


69/94


/5. 'lectronics,


70/94


31. &oulass >ardens pa)s an annual dividend that is expected to increase b) .1 percent per)ear. he stock commands a market rate of return of 1(./ percent and sells for =(.50 a share.What is the expected amount of the next dividend"#. =(.0+

B. =(.1(C. =+.13&. =(.(0'. =(.(8

AACSB: Analytic


Section: 81

!o"ic: Divi#en# a&ount

3(. #tlas Fines has adopted a polic) of increasin the annual dividend on its common stockat a constant rate of (.3 percent annuall). he firm Just paid an annual dividend of =1./3.What !ill the dividend be six )ears from no!"#. =1.88%. =1.5(C. =1.53&. =(.0('. =(.0

&/ B =1./3 × 91.0(3:/ B =1.53

AACSB: Analytic

Difficulty: Basic


Section: 81!o"ic: Divi#en# a&ount

8-30


71/94


3+. # stock pa)s a constant annual dividend and sells for =/.10 a share. reen World stock but need a 1 percent rate ofreturn to compensate for the perceived risk of such o!nership. What is the maximum )ou are!illin to spend per share to bu) this stock if the compan) pa)s a constant =0.50 annualdividend per share"#. =.0B. =/.00C. =/.50&. =3.(0'. =3.80

AACSB: Analytic

Difficulty: Basic


Section: 81!o"ic: Constant #ivi#en#

8-31


72/94


3. ?ome Cannin Aroducts common stock sells for =.5/ a share and has a market rate ofreturn of 1(.8 percent. he compan) Just paid an annual dividend of =1.0 per share. What isthe dividend ro!th rate"#. 8.(5 percent

%. 8. percentC. 5.(+ percent&. 5./3 percentE. 10.( percent



Section: 81

!o"ic: Divi#en# gro$t% rate

3/. Winter ime #dventures is oin to pa) an annual dividend of =(.8/ a share on itscommon stock next )ear. his )ear, the compan) paid a dividend of =(.3 a share. hecompan) adheres to a constant rate of ro!th dividend polic). What !ill one share of thiscommon stock be !orth five )ears from no! if the applicable discount rate is 11.3 percent"#. =+.%. =+.83C. =.1

D. =.15'. =3.00

AACSB: Analytic

Difficulty: 0nter&e#iate Learning Objective: 8-1

Section: 81

!o"ic: uture stoc( "rice

8-3(


73/94


33. ?ihto!er Aharmac) Just paid a =+.10 annual dividend. he compan) has a polic) ofincreasin the dividend b) +.8 percent annuall). ou !ould like to purchase 100 shares ofstock in this firm but reali$e that )ou !ill not have the funds to do so for another four )ears.


74/94


35. Shares of ?ot &onuts common stock are currentl) sellin for =+(.+. he last annualdividend paid !as =1.10 per share and the market rate of return is 10.3 percent. #t !hat rate isthe dividend ro!in"A. 3.0/ percent

%. 8./3 percentC. 10.( percent&. 1(./0 percent'. 1.10 percent

AACSB: Analytic

Difficulty: Basic

Learning Objective: 8-1Section: 81

!o"ic: Divi#en# gro$t% rate

80. Combined Communications is a ne! firm in a rapidl) ro!in industr). he compan) is plannin on increasin its annual dividend b) 1 percent a )ear for the next )ears and thendecreasin the ro!th rate to +. percent per )ear. he compan) Just paid its annual dividendin the amount of =0.(0 per share. What is the current value of one share of this stock if there2uired rate of return is 1. percent"#. =1.8(%. =(.0

C. =(.5&. =(.31'. =+.0

AACSB: Analytic

Difficulty: 0nter&e#iate Learning Objective: 8-1

Section: 81

!o"ic: !$o-stage gro$t%

8-3


75/94


81. KG #irlines paid an annual dividend of =1.( a share last month. he compan) is planninon pa)in =1.0, =1.3, and =1.80 a share over the next + )ears, respectivel). #fter that, thedividend !ill be constant at =( per share per )ear. What is the market price of this stock if themarket rate of return is 10. percent"

#. =1.58%. =1/.03C. =18.(&. =(1.1/'. =(.10

AACSB: Analytic



Section: 81

!o"ic: Nonconstant #ivi#en#s

8(. Dene!


76/94


8+. &iets or ou announced toda) that it !ill bein pa)in annual dividends next )ear. hefirst dividend !ill be =0.1( a share. he follo!in dividends !ill be =0.1, =0.(0, =0.0, and=0./0 a share annuall) for the follo!in )ears, respectivel). #fter that, dividends are proJected to increase b) percent per )ear. ?o! much are )ou !illin to pa) to bu) one share

of this stock toda) if )our desired rate of return is 8. percent"#. =5./3%. =5.5C. =10.+8&. =10.0'. =10.8/

AACSB: Analytic



Section: 81!o"ic: Nonconstant #ivi#en#s

8. Cr)stal >lass recentl) paid =+./0 as an annual dividend. uture dividends are proJected at=+.80, =.10, and =.( over the next + )ears, respectivel). %einnin )ears from no!, thedividend is expected to increase b) +.( percent annuall). What is one share of this stock!orth to )ou if )ou re2uire a 1(. percent rate of return on similar investments"A. =(.5(%. =+.0C. =.1(&. =.88'. =/.0

AACSB: Analytic




8-3/


77/94


8. Ganle) 'nterprises pa)s a constant dividend of =0./0 a share. he compan) announcedtoda) that it !ill continue to pa) the dividend for another ( )ears after !hich time alldividends !ill cease. What is one share of this stock !orth toda) if the re2uired rate of returnis 1/. percent"

#. =0.5(B. =0.5/C. =1.0&. =1.05'. =1.(0



Section: 81


8/. ester)ear Aroductions pa)s no dividend at the present time. he compan) plans to start pa)in an annual dividend in the amount of =0.0 a share for t!o )ears commencin four)ears from toda). #fter that time, the compan) plans on pa)in a constant =0.3 a shareannual dividend indefinitel). ?o! much are )ou !illin to pa) to bu) a share of this stocktoda) if )our re2uired return is 11./ percent"

#. =+.38B. =.((C. =.+3&. =.31'. =.58

AACSB: Analytic




8-33


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83. S!eatshirts 4nlimited is do!nsi$in. he compan) paid a =(.80 annual dividend last )ear.he compan) has announced plans to lo!er the dividend b) ( percent each )ear. ;nce thedividend amount becomes $ero, the compan) !ill cease all dividends and o out of business.ou have a re2uired rate of return of 1. percent on this particular stock iven the compan)*s

situation. What are )our shares in this firm !orth toda) on a per share basis"A. =.15%. =/.51C. =8./8&. =15.(5'. =((.11

AACSB: Analytic

Difficulty: Basic


!o"ic: Negative gro$t%

88. &exter Fetals, paid its first annual dividend )esterda) in the amount of =0.18 a share. hecompan) plans to double each annual dividend pa)ment for the next + )ears. #fter that time,it plans to pa) =1.( a share for ( )ears than then pa) a constant dividend of =1./0 per shareindefinitel). What is one share of this stock !orth toda) if the market rate of return on similarsecurities is 10.( percent"

#. =1(.+(%. =1(.33C. =1+.(0&. =1.(/'. =1.35

AACSB: Analytic



!o"ic: Nonconstant gro$t%

8-38


79/94


85. Farshall #rts Studios Just paid an annual dividend of =1.+/ a share. he firm plans to pa)annual dividends of =1.0, =1./, and =1.8 over the next + )ears, respectivel). #fter thattime, the dividends !ill be held constant at =1./0 per share. What is this stock !orth toda) ata 5 percent discount rate"

#. =1.08%. =1.+0C. =1/./3&. =1/.35E. =13./

AACSB: Analytic




50. ?ome Care Aroviders is pa)in an annual dividend of =1.10 ever) other )ear. he lastdividend !as paid t!o )ears ao. he firm !ill continue this polic) until + more dividend pa)ments have been paid. ;ne )ear after the last dividend normal pa)ment, the compan) plans to pa) a final li2uidatin dividend of =0 per share. What is the current market value of

this stock if the re2uired return is 13 percent"#. =18.5(B. =(0.3C. =(+.1/&. =(.1'. =(.+

AACSB: Analytic Difficulty: 0nter&e#iate


Section: 81


8-35


80/94


51. Gast )ear, ?ansen &eliver) paid an annual dividend of =+.(0 per share. he compan) has been reducin the dividends b) 10 percent annuall). ?o! much are )ou !illin to pa) to purchase stock in this compan) if )our re2uired rate of return is 11. percent"#. =1.5(

%. =3.83C. =1+.0&. =(1.1/'. =(.08



Section: 81

!o"ic: Negative gro$t%

5(. %eatrice Farkets is expectin a period of intense ro!th and has decided to retain more of its earnins to help finance that ro!th. #s a result, it is oin to reduce its annual dividend b) +0 percent a )ear for the next ( )ears. #fter that, it !ill maintain a constant dividend of=(.0 a share. Gast )ear, the compan) paid =+./0 as the annual dividend per share. What is themarket value of this stock if the re2uired rate of return is 1. percent"#. =1./+B. =1/.30

C. =18.08&. =15./1'. =(1.(+

AACSB: Analytic




8-80


81/94


5+. %onnie*s


82/94


5. he preferred stock of Dail Gines,


83/94


53. L)lo,


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101. 'xplain !h) small shareholders should prefer cumulative votin over straiht votin.

With straiht votin, a shareholder must control a maJorit) 90 percent plus one: of theoutstandin shares of stock to ain access to a seat on the board of directors. With cumulative

votin, a shareholder can control one seat on the board b) controllin a lesser number ofshares. he number of shares needed to obtain one seat under cumulative votin is computedas N196M1:O percent M 1 of the outstandin shares, !here 6 is the number of open seats. enerall) speakin, different classes of stock are assined different votin rihts.


86/94


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10. he next dividend pa)ment b) ?illside Farkets !ill be =(.+ per share. he dividendsare anticipated to maintain a . percent ro!th rate forever. he stock currentl) sells for =30 per share. What is the dividend )ield"#. +.(0 percent

B. +.+/ percentC. +. percent&. .0 percent'. .81 percent

AACSB: Analytic

Difficulty: Basic

OC 7: 8-+ Learning Objective: 8-1

Section: 81!o"ic: Divi#en# yiel#

10/. he Stiller Corporation !ill pa) a =+.80 per share dividend next )ear. he compan) pledes to increase its dividend b) (. percent indefinitel). ?o! much are )ou !illin to pa)to purchase this compan)*s stock toda) if )ou re2uire a /.5 percent return on )ourinvestment"#. =.03%. =/+.05

C. =3(.((&. =38.3E. =8.

AACSB: Analytic

Difficulty: Basic

OC 7: 8-


!o"ic: Stoc( "rice

8-83


88/94


103. Suppose )ou kno! a compan)*s stock currentl) sells for =50 per share and the re2uiredreturn on the stock is 10 percent. ou also kno! that the total return on the stock is evenl)divided bet!een a capital ains )ield and a dividend )ield. What is the current dividend if it*sthe compan)*s polic) to al!a)s maintain a constant ro!th rate in its dividends"

#. =.18B. =.(5C. =.+3&. =.0'. =./

&ividend )ield B 0.10( B 0.0

&1 B 0.0 × =50 B =.0

&0 B =.01.0 B =.(5

AACSB: Analytic

Difficulty: Basic

OC 7: 8-9


Section: 81!o"ic: Current #ivi#en#

108. Whistle Stop rains pa)s a constant =1/ dividend on its stock. he compan) !illmaintain this dividend for the next 1 )ears and !ill then cease pa)in dividends forever.What is the current price per share if the re2uired return on this stock is 1 percent"#. =33.38%. =8(.8C. =51.5&. =10/./3'. =11(.00

AACSB: Analytic

Difficulty: Basic OC 7: 8-


Section: 81

!o"ic: Stoc( "rice

8-88


89/94


105. Forristo!n


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111. Sprinboro ech is a )oun start-up compan). 6o dividends !ill be paid on the stockover the next 1 )ears, because the firm needs to plo! back its earnins to fuel ro!th. hecompan) !ill pa) a =1( per share dividend in 1/ )ears and !ill increase the dividend b) + percent per )ear thereafter. What is the current share price if the re2uired return on this stock

is 8 percent"A. =3.//%. =88.15C. =1(0.00&. =1/.5'. =(0.00

AACSB: Analytic


OC 7: 8-11 Learning Objective: 8-1

Section: 81

!o"ic: Stoc( "rice

11(. >allo!a),


91/94


92/94


11. %echtel Fachiner) stock currentl) sells for =0 per share. he market re2uires a 1 percent return on the firm*s stock. he compan) maintains a constant 8 percent ro!th rate individends. What !as the most recent annual dividend per share paid on this stock"#. =+.00

B. =+.(C. =+.0&. =+./3'. =+.51

AACSB: Analytic

Difficulty: 0nter&e#iate OC 7: 8-1


Section: 81

!o"ic: Current #ivi#en#

11/. Southern 4tilities Just issued some ne! preferred stock. he issue !ill pa) a =15 annualdividend in perpetuit) beinnin 5 )ears from no!. What is one share of this stock !orthtoda) if the market re2uires a 3 percent return on this investment"A. =13.53%. =1/.1/C. =185.08

&. =(1.1'. =(31.+


OC 7: 8-18


Section: 81

!o"ic: Stoc( "rice

8-5(


93/94


113. %i alls ours Just paid a dividend of =1. per share. he dividends are expected toro! at +0 percent for the next 8 )ears and then level off to a 3 percent ro!th rateindefinitel). What is the price of this stock toda) iven a re2uired return of 1 percent"#. =/3.

%. =/5.50C. =3(.3D. =33./3'. =38.15


OC 7: 8-';


Section: 81

!o"ic: Stoc( "rice

118. ?arve) Count) Choppers,


94/94

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