Finance Chp. 8
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%
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
Which one of the following applies to the dividend growth model?
Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
Which one of the following statements related to the NYSE is correct?
Exchange members must purchase trading licenses.
Weisbro and Sons common stock sells for $24 a share and pays an annual dividend that increases by 4.9 percent annually. The market rate of return on this stock is 10.6 percent. What is the amount of the last dividend paid by Weisbro and Sons?
$1.30 P0 = $24 = [D0 × (1 + .049)]/(.1060 - .049) D0 = $1.30
A floor broker on the NYSE does which one of the following?
Executes orders on behalf of customers
Ernst & 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
Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?
Right to share in company profits prior to other shareholders
The owner of a trading license for the NYSE is called a:
member.
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
next year's
Braxton's Cleaning Company stock is selling for $33.75 per share based on a required return of 9.4 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 4.3 percent indefinitely?
$1.72 $33.75 = D1/(.0940 − .0430) D1= $1.72
Railway Cabooses just paid its annual dividend of $2.90 per share. The company has been reducing the dividends by 11.9 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 13 percent?
$10.26 P0 = [$2.90 × [1 + (- .119)]]/[.13 - (- .119)] = $10.26
Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one
$10.82 P0 = [$1.42(1.013)]/(.146 − .013) P0 = $10.82
The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?
$13.89 P0 = $2.25/.162 P0 = $13.89
Next year, Jensen's will pay an annual dividend of $3.32 per share. The company has been reducing its dividends by 7 percent annually. What is this stock worth today if the required return is 15.5 percent?
$14.76 P0 = $3.32/(.155 + .07) P0 = $14.76
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(1.0278)]/(.152 − .027) P7 = $15.64
The Garden Shoppe has adopted a policy of increasing its annual dividend at a constant rate of 1.35 percent annually. The company just paid its annual dividend of $1.84. What will the dividend be nine years from now?
$2.08 D8 = $1.84(1.0135)9 D8 = $2.08
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/.138 P4 = $5.4348 P0 = $.25/1.1383 + ($.25 + 5.4348)/1.1384 P0 = $3.56
Nu-Tek has preferred stock outstanding that pays a cumulative $1.50 dividend per quarter. This company has not paid any of its dividends for the past two quarters. How much must be paid as a dividend for each share of preferred stock if the company plans to pay a dividend to its common shareholders this upcoming quarter?
$4.50 Required preferred dividend = 3($1.50) Required preferred dividend = $4.50
HCC, Inc., expects its dividends to grow at 25 percent per year for the next seven years before levelling off to a constant 3 percent growth rate. The required return is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05?
$43.21 P7 = [$1.05(1.25)7(1.03)]/(.11 − .03) P7 = $64.46 P0 = [$1.05 (1.25)/(.11 − .25)][1 − (1.25/1.11)7] + $64.46/1.117 P0 = $43.21
Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?
$5.96 $54.80 = [D0 (1.03)]/(.142 − .03) D0 = $5.96
Michael's, Inc., just paid $2.05 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.5 percent. If you require a rate of return of 8.7 percent, how much are you willing to pay today to purchase one share of the company's stock?
$51.01 P0 = [$2.05 × (1 + .045)]/(.087 - .045) = $51.01
Gnomes R Us just paid a dividend of $1.87 per share. The company has a dividend payout ratio of 60 percent. If the PE ratio is 16.6 times, what is the stock price?
$51.74 EPS = $1.87/.60 = $3.12 P = $3.12(16.60) = $51.74
Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?
$6.52 $58.49 = [D0(1.013)]/(.126 − .013) D0 = $6.52
Morris Companies preferred stock pays a constant $5.75 dividend every year. What is the required return if the stock price is $54.09 per share?
10.63 percent R = $5.75/$54.09 R = .1063, or 10.63%
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
Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?
If cumulative voting applies, Jen is assured one seat on the board.
Who can access Level 3 of NASDAQ's information?
NASDAQ market makers
You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?
Straight
An agent who maintains an inventory from which he or she buys and sells securities is called a:
dealer.
A forward PE is based on:
estimated future earnings.
The dividend growth model:
requires the growth rate to be less than the required return.
Preferred stock may have all of the following characteristics in common with bonds with the exception of:
tax-deductible payments.
NASDAQ has:
three separate markets.
NYSE designated market makers:
act as dealers.
Graphical Designs is offering 5-5 preferred stock. The stock will pay an annual dividend of $5 with the first dividend payment occurring 5 years from today. The required return on this stock is 4.15 percent. What is the price of the stock today?
$102.40 P4 = $5.00/.0415 = $120.48 P0 = $120.48/1.04154 P0 = $102.40
Shore Hotels just paid an annual dividend of $1.50 per share. The company will increase its dividend by 7 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 14 percent?
$14.85 P2 = [$1.50(1.07)(1.05)(1.03)]/(.14 − .03) P2 = $15.78 P0 = [$1.50(1.07)]/1.14 + {[$1.50(1.07)(1.05)] + $15.78}/1.142 P0 = $14.85
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.40 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 15.70 percent on your equity investments?
$15.29 P = $2.40/.1570 = $15.29
Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent?
$15.55 P2 = $2/.137 P2 = $14.60 P0 = [$3(1 − .10)]/1.137 + {[$3(1 − .10)2] + 14.60}/1.1372 P0 = $15.55
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
A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?
$19.57 P1 = $1.63(1.026)(11.7) P1 = $19.57
Global Tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 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 17.4 percent?
$2.03 P4 = [$.20(1.154)(1.025)]/(.174 − .025) P4= $2.40635 P0 = [$.20(1.15)/(.174 − .15)][1 − (1.15/1.174)4] + $2.40635/1.1744 P0= $2.03
A stock currently sells for $61. The dividend yield is 3.7 percent and the dividend growth rate is 5 percent. What is the amount of the dividend to be paid in one year?
$2.26 D1 = .037($61) = $2.26
Flo's Flowers pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected amount of the next dividend?
$2.29 $19.08 = D1/(.138 − .018) D1 = $2.29
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
AC Electric just paid its annual dividend of $2.42. The firm plans to increase its dividend by 2.5 percent for the next 3 years and then maintain a constant 2 percent rate of dividend growth. The required return is 12.5 percent. What is the current value per share of this stock?
$23.82 P3 = [$2.42(1.0253)(1.02)]/(.125 − .02) P3 = $25.32 P0 = [$2.42(1.025)/(.125 − .025)][1 − (1.025/1.125)3] + $25.32/1.1253 P0 = $23.82
Knightmare, Inc., will pay a dividend of $6.25, $10.35, and $13.55 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 9.2 percent on the company's stock. What is the current stock price?
$24.81 P = $6.25/(1 + .092) + $10.35/(1 + .092)2 + $13.55/(1 + .092)3 P = $24.81
Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?
$26.42 P0 = $2.08(12.7) P0 = $26.42
Gee-Gee's is going to pay an annual dividend of $2.05 a share next year. This year, the company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth six years from now if the applicable discount rate is 11.2 percent?
$27.33 g = ($2.05 − 2)/$2 g = .025 P6 = [$2.05(1.0256)]/(.112 − .025) P6 = $27.33
Yummy Bakery just paid an annual dividend of $3.40 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 14.8 percent at the time of your purchase?
$28.18 P1 = [$3.40(1.0222)]/(.148 − .022) P1 = $28.18
Raul wants to join the directors of World Trade but currently owns no shares in the company. He knows that no one else will help elect him. Assume there are 46,000 shares outstanding at a market price of $12.80 a share. What is the minimum amount Raul must spend to acquire a seat on the board of directors if there are three open seats and straight voting applies?
$294,412.80 Minimum amount = (46,000/2 + 1)($12.80) Minimum amount = $294,412.80
The stock in Up-Towne Movers is selling for $48.20 per share. Investors have a required return of 11.2 percent and expect the dividends to grow at 3.6 percent indefinitely. What was the dividend the company just paid?
$3.53 $48.20 = D1/(.1120 − .0360) D1 = $3.66 D0 = $3.66/(1 + .0360) D0 = $3.53
Stana, Inc., has preferred stock outstanding that sells for $96.52 per share. If the required return is 3.72 percent, what is the annual dividend?
$3.59 D = $96.52 × .0372 = $3.59
JL Co. stock currently sells for $64 per share and the required return is 12 percent. The total return is evenly divided between the capital gains yield and the dividend yield. What is the current dividend per share if it's the company's policy to always maintain a constant growth rate in its dividends?
$3.62 Dividend yield = .12/2 Dividend yield = .06, or 6% D1 = .06($64) D1 = $3.84 D0 = $3.84/1.06 D0 = $3.62
Brickhouse is expected to pay a dividend of $3.00 and $2.40 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.6 percent. What is the stock price today if the required return is 11 percent?
$31.91 P2 = [$2.40(1 + .036)]/(.110 - .036) = $33.58 P0 = $3.00/1.110 + ($2.40 + 33.58)/1.1102 = $31.91
The UpTowner just paid an annual dividend of $4.12. The company has a policy of increasing the dividend by 2.5 percent annually. You would like to purchase 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 rate of return of 16.7 percent, how much will you be willing to pay per share when you can afford to make this investment?
$32.83 P4 = [$4.12(1.0255)]/(.167 − .025) P4 = $32.83
Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?
$33.54 P0 = $4/1.18 + $3/1.182 + $46/1.183 P0 = $33.54
Jensen Shipping currently has an EPS of $2.31, a benchmark PE of 13.5, and an earnings growth rate of 2.3 percent. What is the target share price 4 years from now?
$34.15 P4 = $2.31(1.0234)(13.5) P4 = $34.15
New Gadgets, Inc., currently pays no dividend but is expected to pay its first annual dividend of $5.45 per share exactly 6 years from today. After that, the dividends are expected to grow at 3.6 percent forever. If the required return is 12.4 percent, what is the price of the stock today?
$34.52 P5 = $5.45/(.124 − .036) = $61.93 P0 = $61.93/1.1245 P0 = $34.52
This morning you purchased a stock that just paid an annual dividend of $2.60 per share. You require a return of 10.5 percent and the dividend will increase at an annual growth rate of 3.5 percent. If you sell this stock in three years, what will your capital gain be?
$4.18 P0 = [$2.60(1 + .035)]/(.105 − .035) = $38.44 P0 = [$2.60(1 + .035)4]/(.105 − .035) = $42.62 Capital gains = $42.62 − 38.44 = $4.18
The Red Bud Co. pays a constant dividend of $2.50 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.1 percent?
$4.45 P0 = $2.50/1.081 + $2.50/1.0812 = $4.45
Red Sun Rising just paid a dividend of $2.64 per share. The company said that it will increase the dividend by 30 percent and 25 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. If the required return is 12.2 percent, what is the stock price today?
$46.51 P2 = [$2.64(1.300)]/1.122 + [$2.64(1.300)(1.250)]/1.1222 + {[$2.64(1.300)(1.250)(1.034)]/(.122 − .034)}/1.1222 P0 = $46.51
Erna Company is expected to pay a dividend of $2.55 one year from today and $2.70 two years from today. The company's sales in two years are expected to be $15,800,000. The company has a PS ratio of 1.73 times, and 525,000 shares outstanding. If the required return on the company's stock is 11.1 percent, what is the current stock price?
$46.66 Sales per share2 = $15,800,000/525,000 = $30.10 P = $2.55/1.111 + $2.70/1.1112 + ($30.10 × 1.73)/1.1112 = $46.66
Stoneheart Group is expected to pay a dividend of $2.95 next year. The company's dividend growth rate is expected to be 4.4 percent indefinitely and investors require a return of 10.6 percent on the company's stock. What is the stock price?
$47.58 P0 = $2.95/(.106 - .044) = $47.58
Ghost Riders Co. has an EPS of $1.63 that is expected to grow at 8.3 percent per year. If the PE ratio is 18.95 times, what is the projected stock price in 6 years?
$49.84 EPS6 = $1.63(1.083)6 = $2.63 P6 = $2.63(18.95) = $49.84
A preferred stock sells for $63.60 a share and provides a return of 8.40 percent. What is the amount of the dividend per share?
$5.34 D = .0840($63.60) D = $5.34
Farmco just paid its annual dividend of $.32 per share. The dividends are expected to grow at 25 percent annually for the next 4 years and then level off to an annual growth rate of 3 percent indefinitely. What is the price of this stock today given a required return of 15 percent?
$5.42 P4 = [$.32(1.25)4(1.03)]/(.15 − .03) P4 = $6.71 P0 = [$.32(1.25)/(.15 − .25)][1 −(1.25/1.15)4] + $6.71/1.154 P0 = $5.42
Hi-Tek is a young start-up company that is currently retaining all of its earnings. The company plans to pay a $2 per share dividend in Year 7 and increase that dividend by 2.2 percent per year thereafter. What is the current share price if the required return is 16 percent?
$5.95 P6 = $2/(.16 − .022) P6 = $14.49 P0 = $14.49/1.166 P0 = $5.95
AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend?
$6.84 D1 = .122($56.07) D1 = $6.84
Mariota Corp. just paid a dividend of $4.25 per share on its stock. The dividend growth rate is expected to be 3.25 forever and investors require a return of 13.5 percent on this stock. What will the stock price be in 13 years?
$64.88 P13 = [$4.25(1.0325)14]/(.1350 − .0325) = $64.88
Symon's Suppers Co. has announced that it will pay a dividend of $4.33 per share one year from today. Additionally, the company expects to increase its dividend by 4.5 percent annually. The required return on the company's stock is 11.1 percent. What is the current share price?
$65.61 P0 = $4.33/(.111 - .045) = $65.61
J&J Foods wants to issue 5.4 percent preferred stock with a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a return of 8.2 percent. What should the offer price be?
$65.85 P = [.054 ($100)]/.082 P = $65.85
Rise Above This has sales per share of $20.79 that is expected to grow at 6.4 percent per year. The PS ratio is 2.07 times. What is the projected stock price in 7 years?
$66.44 EPS7 = $20.79(1.064)7 = $32.10 P7 = $32.10(2.07) = $66.44
Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent?
$66.92 P7 = $12/.095 P7 = $126.32 P0 = $126.32/1.0957 P0 = $66.92
Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?
$7.33 P0 = [$4.20 (1 − .25)]/(.18 + .25) P0 = $7.33
Fowler is expected to pay a dividend of $1.71 one year from today and $1.86 two years from today. The company has a dividend payout ratio of 40 percent and the PE ratio is 18.45 times. If the required return on the company's stock is 11.4 percent, what is the current stock price?
$72.17 EPS2 = $1.86/.40 = $4.65 P = $1.71/1.114 + $1.86/1.1142 + ($4.65 × 18.45)/1.1142 = $72.17
AOK preferred stock pays an annual dividend of $6.50. What is the current price of this stock at a discount rate of 8.9 percent?
$73.03 P0 = $6.50/.089 P0 = $73.03
McKerley Corp. has preferred stock outstanding that will pay an annual dividend of $4.60 per share with the first dividend exactly 14 years from today. If the required return is 3.78 percent, what is the current price of the stock?
$75.13 P13 = $4.60/.0378 = $121.69 P0 = $121.69/(1 + .0378)13 = $75.13
Flex Co. just paid total dividends of $675,000 and reported additions to retained earnings of $2,025,000. The company has 555,000 shares of stock outstanding and a benchmark PE of 15.7 times. What stock price would you consider appropriate?
$76.38 EPS = ($675,000 + 2,025,000)/555,000 = $4.86 P = $4.86(15.70) = $76.38
Silky Smooth has an EPS of $3.17 per share and a profit margin of 7.1 percent. If the PS ratio is 1.8 times, what is the stock price?
$80.37 Sales per share = $3.17/.071 = $44.65 P = $44.65(1.80) = $80.37
The common stock of Sweet Treats is selling for $48.35 per share. The company is expected to have an annual dividend increase of 3.2 percent indefinitely and pay a dividend of $3.60 in one year. What is the total return on this stock?
10.65% R = ($3.60/$48.35) + .032 = .1065, or 10.65%
The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 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?
10.86 percent R = .0189 + [($1.70 − 1.56)/$1.56] R = .1086, or 10.86%
Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?
10.95 percent $36.84 = [$1.61(1 + g)/(.158 − g) g = .1095, or 10.95%
A stock just paid a dividend of $3.93 and is expected to maintain a constant dividend growth rate of 4.8 percent indefinitely. If the current stock price is $64, what is the required return on the stock?
11.24% Dividend yield = [$3.93(1 + .048)]/$64 = .0644, or 6.44% Required return = 4.8% + 6.44% = 11.24%
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?
12.46 percent Dividend yield = .1456 − .021 Dividend yield = .1246, or 12.46%
Southern Markets recently paid an annual dividend of $2.62 on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $28.12 a share. What is the market rate of return?
13.47 percent R = [$2.62(1.038)]/$28.12 + .038 R = .1347, or 13.47%
Shares of common stock of the Samson Co. offer an expected total return of 21.20 percent. The dividend is increasing at a constant 5.80 percent per year. The dividend yield must be:
15.40% Dividend yield = 21.20% - 5.80% = 15.40%
The common stock of Eddie's Engines, Inc., sells for $29.01 a share. The stock is expected to pay a dividend of $3.90 per share next year. Eddie's has established a pattern of increasing their dividends by 6.0 percent annually and expects to continue doing so. What is the market rate of return on this stock?
19.44% R = $3.90/$29.01 + .060 = 0.1944, or 19.44%
For the past six years, the stock price of Slippery Rock Mining has been increasing at a rate of 8.6 percent per year. Currently, the stock is selling for $68 per share and has a required return of 5.8 percent. What is the dividend yield?
2.8% Dividend yield = 8.6% − 5.8% = 2.8%
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
Voltanis Corp. has preferred stock outstanding that will pay an annual dividend of $2.85 every year in perpetuity. If the stock currently sells for $92.87 per share, what is the required return?
3.07% R = $2.85/$92.87 = .0307, or 3.07%
Currently, a firm has a benchmark PE of 11.7 and an EPS of $3.20. Earnings are expected to grow 3.2 percent annually. What is the implicit rate of return?
3.20 percent P0 = $3.20(11.7) P0 = $37.44 P1 = $3.20(1.032)(11.7) P1 = $38.638 R = ($38.638 − 37.44)/$37.44 R = .0320, or 3.20%
Russell United has 28,500 shares of stock outstanding and has two open seats on its board of directors. Each share of common stock is granted one vote. How many additional votes are required to guarantee a seat on the board if the company were to use straight voting rather than cumulative voting?
4,750 Votes requiredStraight = 28,500/2 + 1 Votes requiredStraight = 14,251 Votes requiredCumulative = 28,500/(2 + 1) + 1 Votes requiredCumulative = 9,501 Difference = 14,251 − 9,501 Difference = 4,750
The next dividend payment by HG Enterprises will be $1.82 per share with future increases of 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield?
4.70 percent Dividend yield = $1.82/$38.70 Dividend yield = .0470, or 4.70%
Browning, Inc. owns 50,000 shares of preferred stock in Omega, Inc. What percentage, if any, of the dividend income received by Browning, Inc. from this investment is excluded from federal income taxation in 2018?
50 percent
The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?
50 percent plus one vote
The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?
6.41 percent R = $2.28/$47.92 + .0165 R = .0641, or 6.41%
You want a seat on the board of directors of Four Keys, Inc. The company has 285,000 shares of stock outstanding and the stock sells for $64 per share. There are currently 3 seats up for election. If the company uses cumulative voting, how many shares do you need to guarantee that you will be elected to the board?
71,251 shares Shares necessary = {[1/(1 + 3)] × 285,000} + 1 = 71,251 shares
Jensen Shipping has 38,400 shares outstanding and uses cumulative voting. The firm grants one vote for each share of common stock. What is the minimum number of votes required to obtain a seat on the board of directors if there are three open seats?
9,601 Minimum votes = 38,400/(3 + 1) + 1 Minimum votes = 9,601
The Uptowner will pay an annual dividend of $3.26 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?
9.44 percent R = $3.26/$49.10 + .028 R = .0944, or 9.44%
Hot Teas common stock is currently selling for $38.97. The last annual dividend paid was $1.26 per share and the market rate of return is 13.2 percent. At what rate is the dividend growing?
9.65 percent $38.97 = [($1.26(1 + g)]/(.132 − g) g = .0965, or 9.65%
You want a seat on the board of directors of Four Keys, Inc. The company has 190,000 shares of stock outstanding and the stock sells for $75 per share. There are currently 3 seats up for election. The company uses straight voting. How many shares do you need to guarantee that you will be elected to the board?
95,001 shares Shares necessary = 190,000/2 + 1 = 95,001 shares
Which one of the following transactions occurs in the primary market?
A purchase of newly issued stock from the issuer
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
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Constant-growth model
Which one of the following statements related to corporate dividends is correct?
Corporate shareholders may receive a tax break on a portion of their dividend income.
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
What are the distributions of either cash or stock to shareholders by a corporation called?
Dividends
Which one of the following statements is correct?
Stocks can have negative growth rates.
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.
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.
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
A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):
floor broker.
An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:
floor trader.
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.