GOOD Fin Management Chapter 8

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?

$1.79 P4 = {$0.20 × (1 + .15)4 x [1 + (-.035)]1} / [.155 - (-.035)] = $1.78 P0 = [$0.20 × (1 +0 .15)1] / (1 + 0.155)1 + [$0.20 × (1 + .15)2] / (1 + 0.155)2 + [$0.20 × (1 + .15)3] / (1 +0 .155)3 + [$0.20 × (1 + .15)4+ $1.78]/ (1 +0 .155)4 = $1.79

Electric Utilities just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity beginning 10 years from now. What is one share of this stock worth today if the market requires a return of 9 percent on this investment?

$102.32 P9 = $20 / .09 = $222.22 P0 = $222.22 / (1 + .09)9 = $102.32

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?

$12.32 P0 = {$1.94 × [1 + (-.0125)]} / [.145 - (-.0125)] = $12.16

Next year, Jensen's will pay an annual dividend of $2.75 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay today to purchase stock in this company if your required rate of return is 11.5 percent?

$12.79 P0 = $2.75 / [.115 - (-.10) = $12.79

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?

$122.08 = 5.29 x 19.5 x (4.3)^4 EPS x PE x g^4 g= growth

The Grist Mill just paid a dividend of $1.46 per share on its stock. The dividends are expected to grow at a constant rate of 3.5 percent per year, indefinitely. What will the price of this stock be in 5 years if investors require an annual return of 15 percent?

$15.61 P5 = [$1.46 × (1 + .035)6] / ( .15 - .035) = $15.61

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?

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

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?

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

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?

$26.94 P0 = $3.30 / (.15 - .0275) = $26.94

Your local toy store just announced that it will pay a $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 14 percent, what should one share sell for today?

$36.87

Whistle Stop pays a constant annual $8 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 12.6 percent?

$38.92

Suppose you know a company's stock currently sells for $85 per share and the required return is 10 percent. You also know that the total return on the stock 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?

$4.05

A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the target stock price in one year?

$43.24, p0 = 2.54 x 16.4 x 1.038

A preferred stock sells for $54.45 a share and provides a return of 9.826 percent. What is the amount of the dividend per share?

$5.35

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?

$5.78

A stock pays a constant annual dividend and sells for $56.07 a share. If the market rate of return on this stock is 12.2 percent, what is the amount of the next annual dividend?

$6.84

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?

$68.42

HCC, Inc., is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next seven years before leveling off to 7 percent into perpetuity. The required return on the stock is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05?

$76.67

You want to purchase some shares of JJ Farms stock but need a 14.5 percent rate of return to compensate for the perceived risk. What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $1.25 annual dividend per share?

$8.62

Morris Companies has an issue of preferred stock outstanding that pays a $7.75 dividend every year in perpetuity. What is the required return if this issue currently sells for $68.19 per share?

11.37 percent R = $7.75 / $68.19 = 11.37 percent

A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What is the rate of return on this security?

11.52 percent

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 = 12.46 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?

14.60 percent

The next dividend payment by HG Enterprises will be $2.35 per share. The dividends are anticipated to maintain a 2.5 percent growth rate forever. The stock currently sells for $54.60 per share. What is the dividend yield?

4.30 percent

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?

4.68 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 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?

6.83 percent

Hot Teas common stock is currently selling for $41.04. The last annual dividend paid was $1.31 per share and the market rate of return is 11.2 percent. At what rate is the dividend growing?

7.76 percent

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.

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 statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative.

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

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

Dividend yield.

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

Dividends

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.

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of a commission 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.

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.

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.

Supernormal growth is a growth rate that:

Is unsustainable over the long term.

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

Order flow.

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.

The counter area on the floor of the NYSE where a designated market maker operates is called a:

Post.

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

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.

Which one of the following statements is correct?

Stocks can have negative growth rates.

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

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?

SuperDOT.

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

Tax-deductible payments

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 by proxy

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

Home Parties is paying an annual dividend of $1.25 every other year. The last dividend was paid last year. The firm will continue this policy until two more dividend payments have been paid. One year after the last normal dividend payment, the company plans to pay a final liquidating dividend of $25 per share. What is the current market value of this stock if the required return is 17 percent?

$15.19 P0 = $1.25 / (1 + .17)1 + $1.25 / (1 + .17)3 + $25 / (1 + .17)4 = $15.19

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?

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

AC Electric just paid a $2.10 per share annual dividend. The firm pledges to increase its dividend by 2.4 percent for the next five years and then maintain a constant 2 percent rate of dividend growth. If the required return is 15 percent, what is the current value of one share of this stock?

$16.74 P5 = [$2.10 × (1 + .024)5 × (1 + .02)1] / (.15 - .02) = $18.55 P0 = [$2.10 × (1 + .024)] / (1 + .15) + [$2.10 × (1 + .024)2] / (1 + .15)2 + [$2.10 × (1 + .024)3] / (1 + .15)3 + [$2.10 × (1 + .024)4] / (1 + .15)4 + [$2.10 × (1 + .024)5 + $18.55]/ (1 + .15)5 = $16.74

Kay's Sewing Loft is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result, it 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 a $3 dividend per share. What is the market value of this stock if the required rate of return is 12.5 percent?

$16.96

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 9 percent?

$17.50 P3 = $1.60 / .09 = $17.78 P0 = $1.45 / (1 + .09) + $1.50 / (1 + .09)2 + ($1.53 + 17.78) / (1 + .09)3P0 = $17.50

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?

$2.10

Flo's Flowers pays an annual dividend that is expected to increase by 2.1 percent per year. The stock commands a market rate of return of 13.8 percent and sells for $19.06 a share. What is the expected amount of the next dividend?

$2.23

Timber Co. is a mature manufacturing firm. The company just paid a $5.40 annual dividend and management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to pay today per share to buy this stock if you require a return of 14.5 percent?

$20.91

The Shore Hotel just paid a dividend of $2 per share. The company will increase its dividend by 6 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 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 12 percent?

$21.58 P2 = [$2 × (1 + .06) × (1 + .04) × (1 + .02)] / (.12 - .02) = $22.49 P0 = [$2 × (1 + .06)]/ (1 + .12) + {[$2 × (1 + .06) × (1 + .04)] + $22.49} / (1 + .12)2 = $21.58

Global Logistics just announced it is increasing its annual dividend to $1.68 next year and establishing a policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this stock be worth ten years from now if the required rate of return is 13.5 percent?

$22.57 P10 = [$1.68 × (1 + .10325)10] / (.135 - .0325) = $22.57

Gee-Gee's is going to pay an annual dividend of $2.05 a share on its common stock 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 five years from now if the applicable discount rate is 10.9 percent?

$27.61

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?

$3.25 P0 = $.52 / .16 = $3.25

Farmco just paid a dividend of $.20 per share. The dividends are expected to grow at 20 percent annually for the next 7 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?

$3.98

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?

$52.94

Currently, a firm has an EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the estimated current stock price?

$41.66 P0 = $2.54 × 16.4 = 41.66

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?

$41.74

K's Fashions is growing quickly. Dividends are expected to increase by 15 percent annually for the next three years, with the growth rate falling off to a constant 5 percent thereafter. The required return is 16 percent and the company just paid a $3.80 annual dividend. What is the current share price?

$46.55 P3 = [$3.80 × (1 + .15)3 × (1 + .05)] / (.16 - .05) = $55.17 P0 = [$3.80 × (1 + .15)] / (1.16) ] + [$3.80 × (1 + .15) 2] / (1.16) 2] + [$3.80 × (1 + .15) 3 + $55.17] / (1.16) 3] = $46.55

Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 15 years, because the firm needs to plow back its earnings to fuel growth. The company plans to pay a $6 per share dividend in 16 years and will increase the dividend by 4 percent per year thereafter. What is the current share price if the required return on this stock is 16 percent?

$5.40 P15 = $6 / (.16 - .04) = $50 P0 = $50 / (1 + .16)15 = $5.40

Sweatshirts Ltd. is downsizing. The company paid a $3.80 annual dividend last year and has announced plans to lower the dividend by 30 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 given the company's situation. What are your shares in this firm worth today on a per share basis?

$5.54 P0 = {$3.80 × [1 + -0.30] } / [0.18 - -0.30] = $5.54

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?

20.59 percent g = .216 - 0.0101 = 20.59 %

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

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?

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

NYSE designated market makers:

Act as dealers.

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

Broker.

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

Dealer.

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

Market where outstanding shares of stock are resold.

The owner of a trading license for the NYSE is called a:

Member

Which one of the following statements applies to NASDAQ?

Multiple market maker system.

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

Who can access Level 3 of NASDAQ's information?

NASDAQ market makers.

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 dividend growth model:

Requires the growth rate to be less than the required return

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.

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.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

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

g1 can be greater than R.