PBF Chapter 8

Baseheart, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is:

$20.83

Shara Miselle Co. just paid a dividend of $1.65 (D0) on its common stock. This company's dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value per share of Shara Miselle stock.

$21.24

The PDQ Company's common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?

$22.22

Casino Games Company preferred stock pays a perpetual annual dividend of 3.5% of its $100 par value. If investors' required rate of return on this stock is 11%, what is the value per share?

$31.82

CMT, Inc. has an issue of preferred stock whose par value is $500. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for?

$409.09

What is the value of a preferred stock that pays a $4.50 dividend to an investor with a required rate of return of 10%?

$45

Nuray Corp. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%?

$5.00

Lily Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required rate of return on this stock is 15.5%, compute the current value per share of Lily Co. stock.

$56.23

Kilsheimer Company just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%?

$59.44

Yanti Corp. preferred stock has a 5% stated dividend percentage, and a $100 par value. What is the value of the stock if your required rate of return is 6% per year?

$83.33

Greenland Airlines has net income of $2 million this year. The book value of Greenland Airlines common equity is $8 million dollars. The company's dividend payout ratio is 60% and is expected to remain this way. What is Greenland Airlines' internal growth rate?

10%

ADR Bank preferred stock pays an annual dividend of $2.75 per share. If the stock is currently selling for $27.50 per share, what is the expected rate of return on this stock?

10.%

Creamy Custard common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Creamy Custard's stock?

11.11%

Johnstown Supply Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on Johnstown Supply Corporation stock.

16.12%

Butler Corp paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If Butler Corp stock is selling for $50.00 per share, the stockholders' expected rate of return is:

16.50%

Bell Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)?

21.8%

Bin Restaurant Corp preferred stock has a market price of $14.50. If it has a yearly dividend of $3.50, what is your expected rate of return if you purchase the stock at its market price?

24.14%

United Financial Corp had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was 60%. If these relationships continue, what will be United Financial Corp's internal growth rate?

8.6%

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision?

Callable

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?

Cumulative

Which of the following is not true regarding common stock?

Dividend payments, like interest payments, are fixed.

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

False, because the required return could be different

H. J. Corp.'s common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If H. J.'s current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock?

No, the stock is overpriced.

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?

Sinking fund

Which of the following statements concerning the required rate of return on stocks is true?

The higher the risk, the higher the required return, other things being equal.

Which of the following statements concerning the constant growth dividend valuation model is true?

The required rate of return must exceed the growth rate.

Which of the following changes will make the value of a stock go up, other things being held constant?

The required return decreases.

How is preferred stock affected by a decrease in the required rate of return?

The value of a share of preferred stock increases.

Keyes Corporation preferred stock pays an annual dividend of $7 per share. Which of the following statements is true for an investor with a required return of 9%?

The value of the preferred stock is $77.78 per share.

You observe Golden Flashes Common Stock selling for $40.00 per share. The next dividend is expected to be $4.00, and is expected to grow at a 5% annual rate forever. If your required rate of return is 12%, should you purchase the stock?

Yes, because the present value of the expected future cash flows is greater than $40.

Lily Co.paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock?

Yes, the market price is below the intrinsic value of the stock.

Preferred stock is similar to a bond in the following way:

both investments provide a stated income stream.

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever, the increase in the value of the stock each year should be equal to the

growth rate in dividends, g.

Which of the following features, or benefits, belong to a firm's common stockholders?

limited liability ownership of the firm voting rights

Preferred stock valuation usually treats the preferred stock as a:

perpetuity.

Cumulative preferred stock:

requires dividends in arrears to be carried over into the next period.

All of the following affect the value of a share of common stock except:

the stock and paid-in-capital amounts on the balance sheet.