Chapter 8 Quiz

Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.94 a share. Secondly, all dividends after that will decrease by 1.25 percent annually. What is the value of this stock at a discount rate of 14.5 percent?

$12.32 Math: P0 = $1.94 / [.145 − (−.0125)] = $12.32

The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 13.6 percent annual return?

$13.53 Math: P0 = $1.84 / .136 = $13.53

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?

$26.94 Math: P0 = $3.30 / (.15 - .0275) = $26.94

How much are you willing to pay for one share of LBM stock if the company just paid a $1.23 annual dividend, the dividends increase by 3.1 percent annually, and you require a return of 16 percent?

$9.83 Math: P0 = [$1.23 ×(1 + .031)] / (.16 - .031) = $9.83

Which one of the following applies to the dividend growth model?

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

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

Market where outstanding shares of stock are resold.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 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:

Priced the same as a $1 perpetuity.

The constant dividend growth model:

Requires the growth rate to be less than the required return.

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield.

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount Rate

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Dividend growth.

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

Dividend yield.

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

Which one of the following statements is correct?

Stocks can have negative growth rates.

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

Broker

Supernormal growth is a growth rate that:

is unsustainable over the long term.

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary