intro to finance chapter 8 problems

Home Products common stock sells for $18.31 a share and has a market rate of return of 12.8 percent. The company just paid an annual dividend of $1.42 per share. What is the dividend growth rate?

$18.31 = [$1.42 ×(1 + g) / (.128 - g) g = .0468, or 4.68 percent

Roy's Welding common stock sells for $48.96 a share and pays an annual dividend that increases by 2.5 percent annually. The market rate of return on this stock is 14.6 percent. What is the amount of the last dividend paid?

$48.96 = [D0 ×(1 + .025)] / (.146 - .025) D0 = $5.78

Farm Machinery stock currently sells for $65 per share. The market requires a return of 14 percent while the company maintains a constant 8 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?

$65 = [D0 ×(1 + .08)] / (.14 - .08) D0 = $3.61

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.

3

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

A decrease in all stock values.

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

A purchase of newly issued stock from ATamp;T.

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

Broker

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

Capital gains yield

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

Capital gains yield.

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

Commission broker

Which one of the following best describes NASDAQ?

Computer network of securities dealers

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.

The Garden Shoppe has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 1.65 percent annually. The firm just paid an annual dividend of $1.84. What will the dividend be eight years from now?

D8 = $1.84 �(1.0165)8 = $2.10

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

Dealer

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

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 sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?

Dividend yield = .1456 - .021 = .1246, or 12.46 percent

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

Dividend yield.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

Must still declare each dividend before it becomes an actual company liability.

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?

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

J&J Foods wants to issue some 6.5 percent preferred stock that has a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a return of 9.5 percent. What should the offer price be?

P = (.065 ×$100) / .095 = $68.42

GEO Inc. has paid annual dividends of $.41, $.47, and $.52 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a rate of return of 16 percent. What is the maximum amount you are willing to pay for one share of this stock today?

P0 = $.52 / .16 = $3.25

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?

P0 = $1.84 / .136 = $13.53

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?

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

A preferred stock pays a $4.50 annual dividend. What is the maximum price you are willing to pay for one share of this stock today if your required return is 8.5 percent?

P0 = $4.50 / .085 = $52.94

Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay another dividend. How much are you willing to pay per share today to buy this stock if you require a 10 percent return?

P0 = $7 / (1 + .1) + $8 / (1 + .1)^2 + $9 / (1 + .1)^3 + ($10 / (1 + .1)^4 = $26.57

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

Preferred stock

Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today?

P0 = [$1.37 ×(1 + .028)] / (.116 - .028) = $16.00

Yummy Bakery just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 14 percent at the time of your purchase?

P1 = [$2.20 × (1 + .0222)] / (.14 - .022) = $19.47

Distant Groves announced today that it will begin paying annual dividends next year. Dividends for the first three years will be $.15, $.20, and $.25 a share, respectively. After that, dividends are projected to increase by 4 percent per year. What is one share of this stock worth today at a required return of 8.5 percent?

P3 = [$.25 ×(1 + .04)] / (.085 - .04) = $5.7778 P0 = $.15 / (1 + .085) + $.20 / (1 + .085)2 + ($.25 + 5.7778) / (1 + .085)3 = $5.03

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 to you today if you require a 12.5 percent rate of return on similar investments?

P3 = [$4.25 ×(1 + .0325)] / (.125 - .0325) = $47.44 P0 = $3.80 / (1 + .125) + $4.10 / (1 + .125)2 + ($4.25 + 47.44) / (1 + .125)3 P0 = $42.92

Jensen Shipping currently has an EPS of $5.29, a benchmark PE of 19.5, and an earnings growth rate of 4.3 percent. What is the target share price 4 years from now?

P4 = $5.29 × (1 + .043)^4 × 19.5 = $122.08

Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?

P4 = [$.20 ×(1 + .15)4 ×(1 + .035)] / (.155 - .035) = $3.017 P0 = {[$.20 ×(1 + .15)] / (.155 - .15)} ×{1 - [(1 + .15) / (1 + .155)]4} + $3.017 / (1 + .155)4 = $2.49

The UpTowner just paid a $3.45 annual dividend. The company has a policy of increasing the dividend by 4.5 percent annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a 14.8 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?

P4 = [$3.45 ×(1 + .045)5] / (.148 - .045) = $41.74

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.

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

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

Proxy fight for control of the board.

The Uptowner will pay an annual dividend of $1.98 a share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?

R = $1.98 / $49.10 + .028 = .0683, or 6.83 percent

The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this stock?

R = $2.28 / $43.19 + .0215 = .0743, or 7.43 percent

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual dividend and announced plans to pay $1.27 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?

R = .0189 + [($1.27 - 1.23) / $1.23] = .0514, or 5.14 percent

Southern Markets recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?

R = [$2.80 �(1 + .038)] / $26.91 + .038 = .1460, or 14.60 percent

The dividend growth model:

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

The stream of customer orders coming in to the NYSE trading floor is called the:

The stream of customer orders coming in to the NYSE trading floor is called the:

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 for proxy

NYSE designated market makers:

act as brokers

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

designated market maker.

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

dividends

A forward PE is based on:

estimated future earnings

the capital gains yield as used in the dividend growth model?

g

Gee-Gee common stock returned a nifty 21.6 percent rate of return last year. The dividend amount was $.25 a share which equated to a dividend yield of 1.01 percent. What was the rate of price appreciation for the year?

g = .216 - 0.0101 = 20.59 percent

Which one of the following statements is correct concerning the two-stage dividend growth model?

g1 can be greater than R.

Supernormal growth is a growth rate that:

is unsustainable over the long term.

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

markets where outstanding shares of stock are resold

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

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

tax-deductible payments

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

the stock has a negative capital gains yield.

can stocks have negative growth rates?

yes