Chapter 8 Quiz and Sims

The Grist Mill just paid its annual dividend of $1.58 per share. The dividends are expected to grow at 2.7 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require an annual return of 15.2 percent?

$15.64 P7 = [$1.58(1.027)]/(.152 − .027) P7 = $15.64

Home Parties is paying an annual dividend of $1.78 every other year. The last dividend was paid last year. The firm will continue this policy until two more dividend payments have been paid. Three years after the last normal dividend payment, the company plans to pay a final liquidating dividend of $32 per share. What is the current market value of this stock if the required return is 14.7 percent?

$16.78 P0 = $1.78/1.147 + $1.78/1 .1473 + $32/1.1476 P0 = $16.78

Future Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

$23.57 P0 = $3.10/(.15 − .0185) P0 = $23.57

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a dividend of $.25 per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?

$3.56 P4 = $.75/.138P4 = $5.4348 P0 = $.25/1.1383 + ($.25 + 5.4348)/1.1384 P0 = $3.56

A preferred stock pays an annual dividend of $5.40 and sells for $63.20 a share. What is the rate of return?

8.54 percent R = $5.40/$63.20 R = .0854, or 8.54%

Which one of the following best describes NASDAQ?

Computer network of securities dealers.

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.

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

Capital gains yield =?

dividend growth rate

Required rate of return

dividend growth rate + dividend yield

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

pillar system

The dividend growth model:

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