Chapter 7 finance test 3

A broker is an agent who:

brings buyers and sellers together.

The dividend yield is defined as:

next year's expected dividend divided by the current market price per share.

Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?

($1.23) ×(1.08)4×(1.02)2

The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend?

.1162 = $2.38 / $48.20 + g g = .0668, or 6.68 percent

Which one of the following must equal zero if a firm pays a constant annual dividend?

Capital gains yield

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?

Common stock

Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

Cumulative preferred

The common stock of GT Enterprises is selling for $63.09 a share. The company pays a constant annual dividend and has a total return of 11.64 percent. What is the amount of the dividend?

D = .1164 ×$63.09 = $7.34

The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid?

D0 = [$33 × (.114 - .02)] / (1 + .02) = $3.04

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

D1 = $32.60 ×(.138-.024) = $3.72

The price of a stock at Year 4 can be expressed as:

D5/(R - g).

The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?

D6= $1.64 ×(1.013)6 = $1.77

Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities?

Designated market maker

A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount?

Dividend = .0968 ×$54.20 = $5.25

Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount?

Dividend =.028 ×$27.80 = $.78

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?

Dividend yield + Capital gains yield

For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield?

Dividend yield = .1165-.0821 = .0344, or 3.44 percent

The required return on Mountain Brook stock is 13.8 percent and the dividend growth rate is 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield?

Dividend yield = .138-.0364 = .1016, or 10.16 percent

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

Dividends that are either constant or change annually at a constant rate

A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:

Floor broker.

Which statement is true?

From a legal perspective, preferred stock is a form of corporate equity.

Which one of the following will increase the current value of a stock?

Increase in the capital gains yield

Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?

P = $1.39 /.146 = $9.52

Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $13.50 a share before closing its doors permanently. At a required return of 13.5 percent, what should this stock sell for today?

P0 = $1.60/1.135 + $1.10/1.1352 + $13.50/1.1355= $9.43

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

P0 = $1.90/(.12 -.035) = $22.35 P3 = [$1.90 × (1.035)3]/(.12 -.035) = $24.78 Capital gain = $24.78 -22.35 = $2.43

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

P0 = $1.93 / (.1175 - .016) = $19.01

The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

P0 = ($.50/.18) / (1 + .18)5 = $1.21

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

P0 = ($1.62 × 1.021)/(.157-.021) = $12.16

JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price?

P0 = [$.20/(.12 -.015)] / (1 + .12)5 = $1.08

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent?

P0 = {$.86 × [1 + (-.035)]} / [.178 - (-.035)] = $3.90

The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?

P2 = ($1.35/.164) = $8.23 P0 = [$1.23 /1.164] + [($1.25 + 8.23)/1.1642] P0 = $8.05

Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?

P3 = ($1.05 ×1.04)/(.16 -.04) = $9.10 P0 = ($.62 /1.16) + ($.80/1.162) + [($1.05 + 9.10)/1.163] = $7.63

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

P3 = ($2.40 ×1.10 ×1.02)/(.12 -.02) = $26.928 P0 = [($2.40 ×1.10)/1.12] + [($2.40 ×1.10)/1.122] + {[($2.40 ×1.10) + $26.928]/1.123} P0= $25.51

Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock's current value at a discount rate of 13.7 percent?

P3= ($1.68 × 1.034) / (.137 - .034)= $16.86 P0 = $1.40 / 1.137 + $1.68 / 1.1372 + ($1.68+ $16.86)/ 1.1373 P0= $15.15 References

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

P5 = [$1.78 ×(1 + .0123)6]/(.106-.0123) = $20.44

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

P6 = ($2.80 ×1.0257)/(.16 -.025) = $24.65

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?

Stock with a constant-growth dividend

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

Pink sheets

Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend?

Preferred dividend = 4 ×$1.60 = $6.40

Which one of the following statements is correct?

Preferred stock can be callable.

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

Proxy

Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

R = $2.38/$52.60 = .0452, or 4.52 percent

The VIC Co. has preferred stock outstanding that pays a $4.50 dividend annually and sells for $48.20 per share. What is the rate of return?

R = $4.50/$48.20 = .0934, or 9.34 percent

Vegan Delite stock is valued at $68.60 a share. The company pays a constant annual dividend of $2.40 per share. What is the total return on this stock?

R = ($2.40/$68.60) + 0 = .0350, or 3.50 percent

The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return?

Required return = ($1.38 /$26.90) + .025 = .0763, or 7.63 percent

What is the market called that facilitates the sale of shares between individual investors?

Secondary

Dividends are best defined as:

cash or stock payments to shareholders.

Most trades on the NYSE are executed:

electronically.

Russell Foods pays a fixed annual dividend of $2.28 a share. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price?

g = .115- ($2.28/$43.20) = .0622, or 6.22 percent

The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield?

g = .1167- ($2.64/$48.30) = .0620, or 6.20 percent

Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate?

g =.0948- ($1.58/$18.53) = .0095, or .95 percent

A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year?

g= .0965 - ($.48/$38.24) = .0839, or 8.39 percent

The stream of customer instructions to buy and sell securities is called the:

order flow.

The dividend yield on a stock will increase if the:

stock price decreases.