Fin 301 module 9

The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return? A. $2.38 B. $2.43 C. $2.56 D. $2.60 E. $2.64

a P0 = ($1.20/1.17^1) + ($1/1.17^2) + ($1/1.17^3) = $2.38

If a firm has a 100 percent dividend payout ratio, then the growth rate of the firm is: A. zero percent. B. 100 percent. C. equal to the ROA. D. negative. E. infinite.

a

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? A. $13.45 B. $13.61 C. $13.76 D. $14.02 E. $14.45

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

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: A. weak form efficient. B. strong form efficient. C. semistrong form efficient. D. efficient at any level. E. aware that the trader is an insider.

b

The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the growth rate? A. 9.48 percent B. 10.14 percent C. 10.79 percent D. 11.08 percent E. 11.39 percent

b ROE = {[$5,100/($11,300 + $54,900 - $23,800)] = 0.120283 Retention rate = [($5,100 - $800)/$5,100] = 0.843137 Growth rate = 0.120283 * 0.843137 = 10.14%

Investors receive a total return of 13.7 percent on the common stock of Dexter International. The stock is selling for $41.68 a share. What is the dividend growth rate if the company plans to pay an annual dividend of $2.10 a share next year? A. 7.42 percent B. 8.66 percent C. 10.75 percent D. 11.60 percent E. 13.70 percent

b Capital gains yield = 0.137 - ($2.10/$41.68) = 8.66 percent

The Pancake 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 15 percent rate of return? A. $7.86 B. $8.33 C. $10.87 D. $11.04 E. $11.38

b P = $1.25/0.15 = $8.33

Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the growth rate? A. 6.18 percent B. 6.72 percent C. 7.33 percent D. 7.54 percent E. 7.91 percent

b growth rate = [(0.05 x 1.2 x 1.4) x 0.8] = 6.72 percent

What is the market called that allows shareholders to resell their shares to other investors? A. Primary B. Proxy C. Secondary D. Inside E. Initial

c

Which one of the following types of securities has no priority in a bankruptcy proceeding? A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond

c

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? A. 4.56 percent B. 5.39 percent C. 5.61 percent D. 6.63 percent E. 6.91 percent

c R = $1.60/$28.50 = 5.61 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? A. 8.20 percent B. 8.88 percent C. 9.21 percent D. 9.74 percent E. 10.02 percent

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

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? A. $1.50 x (1.02)^1 B. $1.50 x (1.02)^2 C. $1.50 x (1.02)^3 D. $1.50 x (1.02)^4 E. $1.50 x (1.02)^5

d

Donovan Brothers, Inc. would like to increase its rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio E. Return on equity

d

The Printing Company stock is selling for $32.60 a share based on a 14 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 2.5 percent annually? A. $3.48 B. $3.52 C. $3.57 D. $3.66 E. $3.75

e $32.60 x (0.14 - 0.025) = $3.75

A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount? A. $6.93 B. $6.80 C. $7.25 D. $7.42 E. $7.54

e Dividend = 0.1565 x $48.20 = $7.54

A firm has a return on equity of 16 percent, a return on assets of 11 percent, and a 40 percent dividend payout ratio. What is the growth rate? A. 5.72 percent B. 6.84 percent C. 7.12 percent D. 9.38 percent E. 9.60 percent

e growth rate = 0.16 ´ (1 - 0.40) = 9.60 percent

A market is defined as being strong form efficient if stock prices currently reflect all known market information to include stock prices and volume.

False A market is defined as being strong form efficient if stock prices currently reflect all information to include all market, all public, and all private information.

Preferred stock holders are called preferred owners because they hold more rights and privileges than the common stockholders. This includes, for example, more voting rights than those held by common stockholders.

False Preferred stockholders are provided preference in cash payouts for dividends and in liquidation but do not generally have other rights that provide more benefits than those accorded to the common stockholders.

Treasury stock is stock which has been issued and sold by a firm and is held in escrow by the federal government.

False Treasury stock is stock which has been issued and sold by a firm and has subsequently been repurchased by the firm.

Dividends cannot be paid to stockholders when the firm has net losses and can only be paid if the firm has a net profit.

False the firm may pay dividends even if they have a net loss for the period.

Dividends may be paid to stockholders only when the firm has net earnings and cannot be paid if the firm has a net loss.

False the firm may pay dividends even if they have a net loss for the period.

A tender offer is an open offer to all shareholders to buy their stock at a discounted price below the current market price.

False the offer to buy will be at a premium price, above the current market price.

A market is defined as being semi-strong form efficient if stock prices currently reflect all market information to include stock prices and volume and all other public information.

True

A market is defined as being strong form efficient if stock prices currently reflect all information to include all market, all public, and all private information.

True

A market is defined as being weak form efficient if stock prices currently reflect all market information to include stock prices and volume.

True

A proxy provides the holder or owner of the proxy the right to vote on behalf of a stockholder.

True

Dividends may be paid to stockholders when the firm has net losses.

True

The preemptive right accorded common stock investors provides them with protection from dilution by requiring the issuer of the stock to provide them with the right to purchase enough stock from an additional issue of the same stock to maintain their percentage of ownership.

True

The preemptive right provides the owner of stock with protection from dilution of ownership by preventing a firm from reducing the shareholder's level of control or ownership by issuing additional shares to other investors without first providing a right to purchase additional shares to maintain their ownership percentage to current owners.

True

Treasury stock is stock which has been issued and sold by a firm and has subsequently been repurchased by the firm.

True

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent? A. $8.50 B. $9.67 C. $10.46 D. $12.23 E. $12.49

a P3 = ($1.10 x 1.05)/(0.16 - 0.05) = $10.50 P0 = [$0.55/1.16] + [$0.80/1.16^2] + [($1.10 + $10.50)/1.16^3] = $8.50

Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now. Starting in year six, 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? A. $6.16 B. $6.47 C. $6.63 D. $7.22 E. $7.47

a P5 = ($0.80 x 1.02)/(0.12 - 0.02) = $8.16 P0 = [$0.80/1.12^3] + [$0.80/1.12^4] + [($0.80 + $8.16)/1.125] = $6.16

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? A. $23.60 B. $24.65 C. $25.08 D. $25.50 E. $26.90

b P6 = ($2.80 x 1.025^7)/(0.16 - 0.025) = $24.65

Dividends are best defined as: A. cash payments to shareholders. B. cash payments to either bondholders or shareholders. C. cash or stock payments to shareholders. D. cash or stock payments to either bondholders or shareholders. E. distributions of stock to current shareholders.

c

Dividends are which one of the following? A. Payable at the discretion of a firm's president B. Treated as a tax-deductible expense to the paying firm C. Paid out of aftertax profits D. Paid to holders of record as of the declaration date E. Only partially taxable to high-income individual shareholders

c

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? A. ($1.10) (1.08 x 3) (1.02 x 4) B. ($1.10) (1.08 x 3) (1.02 x 3) C. ($1.10) (1.08)^3 (1.02)^4 D. ($1.10) (1.08)^3 (1.02)^3 E. ($1.10) (1.08)^3 (1.02)^2

c

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return? A. $12.56 B. $12.95 C. $13.31 D. $13.68 E. $14.07

c P0 = ($1.45 x 1.028)/(0.14 - 0.028) = $13.31

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 $1.00 a share. What is the current value of this stock if the required rate of return is 12 percent? A. $17.71 B. $18.97 C. $20.50 D. $21.08 E. $21.69

c P0 = [(1 x 1.2)/1.12] + [(1 x 1.2^2)/1.12^2] + [(1 x 1.2^2 x 1.15)/1.12^3] + [(1 x 1.2^2 x 1.15^2)/1.12^4] + [($3/0.12)/1.12^4 = $20.50

The Market Place recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 15 percent? A. $11.68 B. $12.47 C. $12.99 D. $14.02 E. $14.94

c P4 = ($0.50 x 2^2 x 1.04)/(0.15 - 0.04) = $18.91 P0 = [$0.50/1.15^2] + [$1/1.15^3] + [($2 + $18.91)/1.15^4] = $12.99

The dividend growth model can be used to value the stock of firms which pay which type of dividends? I. constant annual dividend II. annual dividend with a constant increasing rate of growth III. annual dividend with a constant decreasing rate of growth IV. zero dividend A. I only B. II only C. II and III only D. I, II, and III only E. I, II, III, and IV

d

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount? A. Stock pricing model B. Equity pricing model C. Capital gain model D. Dividend growth model E. Present value model

d

Delphin's Marina is expected to pay an annual dividend of $0.58 next year. The stock is selling for $8.53 a share and has a total return of 12 percent. What is the dividend growth rate? A. 3.82 percent B. 4.03 percent C. 4.28 percent D. 5.20 percent E. 5.49 percent

d g = 0.12 - ($0.58/$8.53) = 5.20 percent

If the financial markets are efficient then: A. stock prices should remain constant. B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. C. an increase in the value of one security should be offset by a decrease in the value of another security. D. stock prices will only change when an event actually occurs, not at the time the event is anticipated. E. stock prices should only respond to unexpected news and events.

e