Chapter Practice #6 Chapter 8

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$6.52

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend?

$6.84

A7X Corp. just paid a dividend of $1.25 per share. The dividends are expected to grow at 25 percent for the next 10 years and then level off to a growth rate of 5 percent indefinitely. If the required return is 13 percent, what is the price of the stock today?

$67.71 Explanation: P0=[$1.25(1.25)/(0.13-0.25)][1-(1.25/1.13)^10][1.25(1.05)/(0.13-0.05)]

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

$10.82

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

$12.32

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 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 discount rate of 11.7 percent?

$13.41

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?

$19.57

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?

$26.42

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

$33.54

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

10.95 percent

Which one of the following transactions occurs in the primary market?

A purchase of newly issued stock from the issuer

NYSE designated market makers:

Act as dealers

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

Broker

Which one of the following best describes NASDAQ?

Computer network of securities dealers

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

Dealer

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

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

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

Floor broker

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:

designated market maker.

The dividend growth model:

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

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?

Pillar system

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

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

Discount rate

Which one of the following represents the capital gains yield as used in the dividend growth model?

G

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

over the counter

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $19 in perpetuity, beginning 4 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

$112.70 Explanation: The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in year 4, so we can find the price of the stock in year 3, one year before the first dividend payment. p3= $19/0.12 p3= $158.33 The price of the stock today is the PV of the stock price in the future, so the price today will be: p0= 158.33/(1.12)^3 p0=$112.70

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 three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

$42.92

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

10.86 percent

Ernst & 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

The secondary market is best defined as the market:

where outstanding shares of stock are resold.