FINC Test 3 - Chapter 7

The Waffle House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 25 percent rate of return?

$1.25/0.25 = $5.oo

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

$2.40/$46.10=5.21%

Reynolds Metals common stock is selling for $25 a share and has a dividend yield of 3.1 percent. What is the dividend amount?

$25 * 0.031 = $0.78

A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount?

$48.20 * 0.1565 = $7.54

Keller Metals common stock is selling for $36 a share and has a dividend yield of 3.2 percent. What is the dividend amount?

1.15 Dividend = 0.032 × $36 = $1.15

Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

13.45 P0 = $1.85/(0.16 - 0.0225) = $13.45

The capital gains yield equals which one of the following?

Dividend growth rate

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

Dividend yield = $2.40/$46.10 = 5.21 percent

The required return on Mountain Meadow stock is 14 percent and the dividend growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the dividend yield?

Dividend yield = 0.14 - 0.035 = 10.5 percent

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

Swan Lake 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 12 percent. What is the dividend growth rate?

g = R - (D1/Po) g = 0.12 - ($1.58/$18.53) = 3.47%

Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield ____.

increased; remained constant

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually?

$1.50 × (1.02)^4

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent?

$20.50

The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 15 percent?

$33.93 -See Study Guide

Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the current share price?

$37.92 -See Study Guide

Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now. Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?

$7.70

Venus, Inc. has an issue of preferred stock outstanding that pays a $9.00 dividend every year, in perpetuity. If this issue currently sells for $164.60 per share, what is the required return?

$9.00/$164.60 = 5.47%

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following 3 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?

($1.10) (1.08)^3 (1.02)^4

Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm's stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annual dividend per share paid on the stock?

0.13 = {[D0 × (1 + 0.055)]/$48.29} + 0.055; D0 = $3.43

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 ten years and expects to continue doing so. What will a share of this stock be worth six years from now if the required return is 16 percent?

24.65 P6 = ($2.80 × 1.0257)/(0.16 - 0.025) = $24.65

stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?

5.79 percent -See Study Guide

The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock?

9.85 percent R = ($0.20/$10.80) + 0.08 = 9.85 percent

The Toy Box pays an annual dividend of $2.40 per share and sells for $46.60 a share based on a market rate of return of 15 percent. What is the capital gains yield?

Capital gains yield = 0.15 − ($2.40/$46.60) = 9.85 percent

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 $0.90 a share but all future dividends will be decreased by 10 percent annually. What is a share of this stock worth today at a required return of 15 percent?

D1 = $0.9(1-0.1) = $0.84 Po = D1/(R-g) Po = $0.84/(0.15+0.1) = $3.24

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?

D5 = 2.20(1.028)^5 = $2.53

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

D5/(R - g)

Suppose you know that a company's stock currently sells for $75 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

DY = 14%/2 = 0.07 D1 = $75(0.07) = $5.25 Do=$5.25/1.07=$4.91

Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.5 percent?

Do = $55(0.032) = $1.76 R = [Do(1+g)/Pt]+g R = [($1.76(1.025)/$41]+0.025 =6.90%

Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid?

Do = Po(R-g)/(1+g) D0 = $28.40(0.14-0.015)/(1.015) = $3.50

Berkeley, Inc. just paid an annual dividend of $2.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years?

P12 = ($2.60 × 1.04513)/(0.11 - 0.045) = $70.89

Charles Berkeley, Inc. just paid an annual dividend of $3.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years?

Po=P2/(R-g) P2=$3.60(1.045)^13 Po=[$3.60(1.045)^13]/(0.11-0.045) = $98.15

Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return?

R = $1.60/$28.50 = 5.61%

The next dividend payment by Swenson, Inc. will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?

R = (1.80/48.50)+0.055 = 9.21%

Pluto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $82.30 per share, what is the required return?

Required return = $4.50/$82.30 = 5.47 percent

The next dividend payment by Swenson, Inc., will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?

Required return = ($1.80/$48.50) + 0.055 = 9.21 percent

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

capital gains yield

Dividends are best defined as:

cash or stock payments to shareholders.

The dividend yield is defined as:

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