Module 5 Test

In the event of a corporate bankruptcy, stockholders' are paid before bondholder's True False

False

Preferred stock is an equity security that has a senior claim to the firm's earnings and assets over bonds. True False

False

The result of a stock split is the market value of a stock will increase

False

When a corporation repurchases its own stock, it does so in the secondary markets. True False

True

What is the value of a preferred stock when the dividend rate is 14% on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent?

$116.67

You are considering an investment in Minnix Petroleum's preferred stock. The preferred stock pays a dividend of $2.31. Your required rate of return is 12 percent. What is the value of the stock.

$19.25 per share

Herrea Motor, Inc. paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if investors require a 20 percent rate of return?

$24.50

The preferred stock of the Gandt Corporation pays a $2.75 dividend. What is the value of the stock if your required rate of return is 9 percent?

$30.56

Mosser Corporation's common stock paid $1.32 in dividends last year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require 11 percent return?

$35.31

Calculate the value of a preferred stock that pays a dividend of $6 per share if your required rate of return is 12 percent.

$50 per share

Which of the following changes will make the value of a stock go up, other things being held constant? A) The required return decreases. B) The required return increases. C) In general, investors become more risk averse. D) The growth rate of dividends decreases.

A) The required return decreases.

Haney, Inc.'s preferred stock is selling for $33 per share in the market and pays a $3.60 annual dividend. a. What is the expected rate of return on the stock? b. If an investor's required rate of return is 10 percent, what is the value of the stock for the investor? c. Should the investor buy the stock?

10.91% $36 The investor's required rate of return (10 percent) is less than the expected rate of return for the investment (10.91 percent). As a result, the value of the stock to the investor ($36) exceeds the existing market price ($33). So buy the stock. YES

The common stock of NCP paid $1.35 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years. a. If​ NCP's current market price is $24.88 per​ share, what is the​ stock's expected rate of​ return? b. If your required rate of return is 8.4 percent, what is the value of the stock for​ you? c. Should you make the​ investment?

12.17% $71.82 You should buy the stock because the expected rate of return is greater than your required rate of return or the value of the stock is larger than the current market price

Haney, Inc.'s preferred stock is selling for $21.25 per share in the market and pays a ​$2.75 annual dividend. a. What is the expected rate of return on the​ stock? b. If an​ investor's required rate of return is 9 percent, what is the value of the stock for that​ investor? c. Should the investor acquire the​ stock?

12.94% $30.55 Because the expected rate of return is greater than the​ investor's required rate of return or because the current market price is less than $30.56​, the​ Haney, Inc.'s preferred stock is undervalued and the investor should buy the stock.

Sysco Corp has an 21.73 percent return on equity and retains 50.3% of its earnings for reinvestment purposes. It recently paid a dividend of $1.53 and the stock is currently selling for $48.65 What is the expected return for Sysco Corp stock?

13.81 (13.78-13.84)

Dalton Inc., has an 11.5 percent return on equity and retains 55% of its earnings for reinvestment purposes. It recently paid a dividend of $3.25 and the stock is currently selling for $40. a. What is the growth rate for Dalton? b. What is the expected return for Dalton's stock? c. If you require a 13 percent return, should you invest in the firm?

6.33% 14.96% Because the stock has an expected rate of return of 14.96 percent, which is greater than your 13 percent required rate of return, you should invest.

a. If you require a 13 percent​ return, should you invest in the​ firm? Dalton Inc. has a return on equity of 13.6 percent and retains 56 percent of its earnings for reinvestment purposes. It recently paid a dividend of $2.75 and the stock is currently selling for $42. a. What is the growth rate for Dalton​ Inc.? b. What is the expected return for​ Dalton's stock? c. If you require a 13 percent​ return, should you invest in the​ firm?

7.62% 14.67% Yes

Bates, Inc. pays a dividend of $1 and currently selling for $32.50. If investors require a 12 percent return on their investment from buying Bates stock, what growth rate would bates have to provide investors?

8.66%

Colgate Palmolive pays a dividend of $1.76 and currently selling for $72.92. If investors require a 12 percent return on their investment from buying Colgate Palmolive stock, what growth rate would Colgate Palmolive have to provide investors?

9.36

1. How is preferred stock affected by a decrease in the required rate of return? A) The value of a share of preferred stock increases. B) The dividend increases. C) The dividend decreases. D) The dividend yield increases.

A) The value of a share of preferred stock increases.

You are trying to determine the fair price to pay for a share of JM Smucker. If you buy this stock, you plan to hold it for at least a year. At the end of the year, you expect to receive a dividend of $5.50 and to sell the stock for $154. The discount rate for JM Smucker stock is 16%. What should be the price of this stock today? A. $137.50 B. $144.22 C. $99.80 D. $151.66

A. $137.50

What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%? A. $55.50 B. $22.22 C. $45.00 D. $27.83

A. $55.50

Timberline Industrial Inc. 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%? A. $59.44 B. $33.44 C. $55.56 D. $65.87

A. $59.44

Southland Tours has net income of $2 million this year. The book value of Southland Tours common equity is $8 million dollars. The company's dividend payout ratio is 60% and is expected to remain this way. What is Southland Tours' sustainable growth rate? A. 10% B. 9% C. 6% D. 15%

A. 10%

Verizon (VZ) is expected to pay a $2 annual dividend next year, the current stock price is $50, and the expected growth rate in dividends is 6%. Using the dividend discount growth model, what is the expected return? A. 10% B. 6% C. 12% D. 8%

A. 10%

JP Morgan Senior Notes 5.6% Symbol Closing Price Dividend/share YTD % Chg. JPM.PA $24.79 $1.3625 -1.63 What is the current yield for JP Morgan Preferred Stock? A. 5.5% B. 5.4% C. 5.7% D. 5.6%

A. 5.5%

Applied Materials. had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its retention rate was 60%. If these relationships continue, what will be Applied Material's sustainable growth rate? A. 9.0% B. 6.0% C. 15.6% D. 8.6%

A. 9.0%

The Old Reliable Parcel Service Corporation paid dividends of $0.68 per share in 2000.By 2017, a period of 17 years, its dividends have grown to $3.27 per share.What was the compound annual rate of growth in the company's earnings? A. 9.68 % B. 6.78 % C. 7.81 % D. 4.84 %

A. 9.68 %

All shares of a stock sold to investors are the number of: A. Outstanding shares. B. Issued shares C. Authorized shares D. Treasury shares

A. Outstanding shares.

Which of the following changes will make the value of a stock go up, other things being held constant? A. The required return decreases. B. The growth rate of dividends decreases. C. In general, investors become more risk averse. D. The required return increases.

A. The required return decreases.

Most firms that issue dividends try to maintain a consistent _________________. A. dividend payout ratio B. neither policy is frequently employed C. dividend per share D. both policies are frequently employed

A. dividend payout ratio

Reasons for stock repurchases include all of the following EXCEPT: A. to decrease the value of the stock. B. to acquire shares used in management stock option incentive programs, in which managers can purchase shares of stock at pre-specified prices. C. to use in stock-based acquisitions of other firms. D. the firm has the cash and sees its own stock as one of its most attractive investment alternatives.

A. to decrease the value of the stock.

1. According to Porter's Five Forces a market will usually be more difficult to enter if there is: A. Patented or proprietary know-how B. Low brand loyalty C. Wide access to distribution channels D. Common technology

A. Patented or proprietary know-how

Which of the following statements concerning the required rate of return on stocks is​ true? A. The higher the​ risk, the higher the required​ return, other things being equal. B. The higher an​ investor's required rate of​ return, the higher the value of the stock. C. The required return on preferred stock is generally higher than the required return on common stock. D. If risk is​ reduced, the required return will decrease because more investors are risk−averse.

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

increase in the value of the stock each year should be equal to the A. growth rate in​ dividends, g. B. required return on the​ stock, rcs. C. dividend yield. D. dividend yield plus the capital gains yield.

A. growth rate in​ dividends, g.

The value of a share of stock is listed at $10 . What is the value of the stock after a 1 for 5 split: A. $250 B. $500 C. $200 D. $50

D. $50

JP Morgan Senior Notes 5.6% Symbol Closing Price Dividend/share YTD % Chg. JPM.PA $24.79 $1.3625 -1.63 How much would you be willing to pay for JP Morgan preferred stock if the appropriate discount rate is 9%?

B. $15.14

Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%? A. $0.05 B. $5.0 C. $0.50 D. $50.0

B. $5.0

If you own 100 shares of a stock that has a 1:4 stock split, how many shares do you own after the split: A. 50 shares B. 25 shares C. 100 shares D. 75 shares

B. 25 shares

Johnson & Johnson stock is expected to pay a $3.54 annual dividend next year, the current stock price is $138, and the expected growth rate in dividends is 5.2 %. Using the dividend discount growth model, what is the expected return? A. 12% B. 8% C. 6% D. 10%

B. 8%

American Capital Agency preferred stock has a par value of $50 and pays a dividend of $3.50 per share. It presently sells for $42 per share. What do investors require as a rate of return on this stock? Round off to the nearest .10%. A. 9.3% B. 8.3% C. 6.9% D. 6.5%

B. 8.3%

From 2007 - 2016 Procter and Gamble raised its dividend every year. What was annualized growth rate of dividends for Procter and Gamble during this time? A. 7.95 % B. 8.47 % C. 7.30 % D. 6.88 %

B. 8.47 %

Bueller Testing 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? A. No, the market price is above the intrinsic value of the stock. B. Yes, the market price is below the intrinsic value of the stock. C. Yes, but only if you can keep the stock for at least 5 years. D. No, the growth rate in dividends is too far below the required return.

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

The constant dividend growth model assumes: A. a constant dividend growth rate for no more than the first 10 years B. that the discount rate must be greater than the dividend growth rate C. a constant annual dividend D. none of the above

B. that the discount rate must be greater than the dividend growth rate

According to the Gordon dividend model, which of the following variables would not affect a stock's price? A. the firm's expected growth rate in dividends B. the number of shares outstanding C. all the above affect stock price D. the shareholder's required return

B. the number of shares outstanding

Reasons for stock repurchases include all of the following EXCEPT: A. to use in stock-based acquisitions of other firms. B. to decrease the value of the stock. C. to acquire shares used in management stock option incentive programs, in which managers can purchase shares of stock at pre-specified prices. D. the firm has the cash and sees its own stock as one of its most attractive investment alternatives.

B. to decrease the value of the stock.

Waterfront​ Solutions, Inc. paid a dividend of​ $5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of​ 4% for the next two​ years, at which point the stock is expected to sell for​ $56.00. If investors require a rate of return on​ Waterfront's common stock of​ 18%, what should the stock sell for​ today? A. $44.76 B. $48.51 C. $40.22 D. $50.22

B. $48.51

Preferred stock is similar to a bond in the following​ way: A. Both contain a growth factor similar to common stock. B. Both investments provide a stated income stream. C. Preferred stock always contains a maturity date. D. Both provide interest payments.

B. Both investments provide a stated income stream.

Preferred stock is similar to a bond in the following way: Preferred stock always contains a maturity date. Both investments provide a stated income stream. Both contain a growth factor similar to common stock. Both provide interest payments.

Both investments provide a stated income stream.

1. A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years. The announcement of the contract will A) cause the stock price to increase because rcs (the required return) is likely to increase. B) cause the stock price to decrease because the government usually pays below market price for the goods and services it purchases. C) cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase. D) have no effect on the stock price because the company has not yet paid any dividends.

C) cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase.

Bank of America preferred stock has a 6.2 % stated dividend percentage, and a $25 par value. What is the value of the stock if your required rate of return is 8% per year? A. $25.00 B. $19.85 C. $19.38 D. $22.54

C. $19.38

"With a name like Smucker's it has to be good"! JM Smucker's (SJM) is a 120-year old company and has paid dividends every year since 1949. Smucker in addition to jelly, sells a variety of food products such as Pillsbury, Santa Cruz Organic, Dunkin' Donuts and Folgers Coffee.From 2009 - 2018 Smucker's has raised its dividend every year. What was annualized growth rate of dividends for JM Smucker's during this time? A. 10.89 % B. 8.74% C. 10.29% D. 9.38 %

C. 10.29%

Kenzi owns stock in a company that consistently paid a growing dividend over the last five years. The first year Kenzi owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of dividends during this time? A. 7% B. 5% C. 11% D. 12%

C. 11%

General Dynamics just paid a dividend yesterday of $0.93 per share. The company's stock is currently selling for $170 per share, and the required rate of return on General Dynamics stock is 13%. What is the growth rate expected for General Dynamics Company dividends assuming constant growth? A. 9.85% B. 10.87% C. 12.39% D. 9.67%

C. 12.39%

Eaton Corporation had earnings of $1.22 per share in 1998. By 2018 its earnings had grown to $4.91 per share. What was the compound annual rate of growth in the company's earnings? A. 11.5% B. 12.2% C. 14.9% D. 11.1%

C. 14.9%

United Financial Bancorp, Inc. had a return on equity of 8.5%. The corporation's earnings per share was $1.20, its dividend payout ratio was 43 % . If these relationships continue, what will be United Financial Bancorp, Inc.'s sustainable growth rate? A. 5.25 % B. 4.28 % C. 4.85 % D. 5.17 %

C. 4.85 %

Crandle's Candles common stock is currently selling for $59.00. It just paid a dividend of $1.23 and dividends are expected to grow at a rate of 5.5% indefinitely. What is the required rate of return on Crandle's Candles stock? A. 8.2% B. 7.21% C. 7.70% D. 6.76%

C. 7.70%

You observe Rockwell Automation 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? A. No, because the present value of the expected future cash flows is less than $40. B. No, because the present value of the expected future cash flows is greater than $40. C. Yes, because the present value of the expected future cash flows is greater than $40. D. Yes, because the present value of the expected future cash flows is less than $40.

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

All of the following affect the value of a share of common stock EXCEPT A. the future growth rate for dividends B. the dollar amount of the dividends C. the stock and paid-in-capital amounts on the balance sheet. D. investors' required rate of return

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

ACME, 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 A. $30.00. B. $3.00. C. $20.83. D. $18.33.

C. $20.83.

Stimpson Inc. preferred stock pays a​ $.50 annual dividend. What is the value of the stock if your required rate of return is​ 10%? A.$.05 B.$.50 C.$5.00 D.$50.00

C.$5.00

A firm's stock is to pay a $3 annual dividend next year, the current stock price is $60, and the expected growth rate in dividends is 8%. Using the dividend discount growth model, what is the expected return? A. 5.2% B. 8.6% C. 13% D. 13.4%

D. 13.4%

US Bank has a preferred stock that pays a dividend of $1.30. If you are willing to purchase the stock at $20, what is your required rate of return? (Round your answer to the nearest .1% and assume that there are no transaction costs. A. 7.80% B. 6.7% C. 9.10% D. 6.5%

D. 6.5%

Concho Resources preferred stock has a par value of $25 and pays a dividend of $1.625 per share. It presently sells for $24.25 per share. What do investors require as a rate of return on this stock? Round off to the nearest .10%. A. 12.5% B. 6.3% C. 6.0 D. 6.7%

D. 6.7%

All of the following are characteristics of preferred stocks except: A. Preferred stock dividends are paid before common stock dividends. B. It is a hybrid of both stocks and bonds C. The dividends from a preferred stock are fixed D. Initial value for each preferred stock share is $1,000

D. Initial value for each preferred stock share is $1,000

Which of the following changes will make the value of a stock go up, other things being held constant? A. The required return increases. B. In general, investors become more risk averse. C. The growth rate of dividends decreases. D. The required return decreases.

D. The required return decreases.

You intend to purchase Dorchester common stock at $50 per share, hold it for 1 year, and the sell it after a dividend of $6 is paid. How much will the stock price have to appreciate for you to satisfy your required rate of return of 15 percent?

P1 = $51.50 The stock would have to increase $1.50 ($51.50 - $50) or 3 percent ($1.50/$50) to earn a 15 percent rate of return.

You are considering an investment in one of two preferred stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays of annual dividend of $2.69, while TAYC Capital pays an annual dividend of $2.44. If your required return is 12 percent, what value would you assign to the stocks?

TCF Capital: Value (Vps) = $22.42 per share TAYC Capital : Value (Vps) = $20.33 per share

An​ investor's required rate of return for a common stock can be estimated by summing the​ stock's dividend yield and annual growth​ rate, assuming the growth rate is constant over time

TRUE

Bondholders and preferred stockholders can be viewed as​ creditors, whereas the common stockholders are the true owners of the firm.

TRUE

In​ general, common stock and preferred stock are both valued by calculating the present value of all expected future cash​ flows, using the required return as the discount rate

TRUE

In​ general, common stock and preferred stock are both valued by calculating the present value of all expected future cash​ flows, using the required return as the discount rate.

TRUE

Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds

TRUE

Herrera Motor Inc. paid a $3.75 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a rate of return of 23 percent?

The value of the Herrera Motor common stock is $23.38

Mosser​ Corporation's common stock paid $2.39 in dividends last year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require a return of 14 percent?

The value of the Mosser​ Corporation's common stock is $36.57

You are considering an investment in one of two preferred​ stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays an annual dividend of $3.76​, while TAYC Capital pays an annual dividend of $3.97. If your required return is 12 ​percent, what value would you assign to the​ stocks?

The value of the TCF Capital preferred stock is $31.33per share. The value of the TAYC Capital preferred stock is $33.08 per share

Calculate the value of a preferred stock that pays a dividend of $3.75 per share if your required rate of return is 11percent

The value of the preferred stock is $34.09 per share

Calculate the value of a preferred stock that pays a dividend of $6.00 per share if your required rate of return is 12 percent

The value of the preferred stock is $50per share.

Given that a​ firm's return on equity is 16 percent and management plans to retain 36 percent of earnings for investment​ purposes, what will be the​ firm's growth​ rate?

The​ firm's growth rate will be 5.76​%

Bondholders and preferred stockholders can be viewed as creditors, whereas the common stockholders are the true owners of the firm.

True

In general, common stock and preferred stock are both valued by calculating the present value of all expected future cash flows, using the required return as the discount rate.

True

The discounted dividends valuation model states that the value of a share of stock is the present value of its future dividends. True False

True

The most relevant form of growth for valuing a firm's common stock is internal growth. True False

True

When a corporation repurchases its own stock, it does so in the secondary markets.

True