370 CH 9

Langley Enterprises pays a constant dividend of $0.85 a share. The company announced today that it will continue to pay the dividend for another 2 years after which time all dividends will cease. What is one share of this stock worth today if the required rate of return is 16.5 percent?

$1.36

Moody's Corp has a common stock that will pay a dividend of $12 per share in one year. If the required return is 0.18 and the growth rate of firm is 0.07, find the common stock price today. (Round to the nearest dollar.)

$117

Dover Corp has a common stock that will pay a dividend of $3 per share in one year. If the required return is 0.29 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

$12

Marriott Intl A has a common stock that will pay a dividend of $8 per share next year. If the required return is 0.25 and the growth rate of firm is 0.09, find the common stock price today. (Round to the nearest dollar.)

$50.0

Intl Paper Co has a common stock that will pay a dividend of $2 per share in one year. If the required return is 0.13 and the growth rate of firm is 0.09, find the common stock price today. (Round to the nearest dollar.)

$55

Freeport-McMoRan Inc has a common stock that will pay a dividend of $8 per share next year. If the required return is 0.19 and the growth rate of firm is 0.06, find the common stock price today. (Round to the nearest dollar.)

$61.5

Genuine Parts Co has a common stock that will pay a dividend of $13 per share next year. If the required return is 0.21 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

$76.5

CSX Corp has a common stock that will pay a dividend of $8 per share in one year. If the required return is 0.15 and the growth rate of firm is 0.05, find the common stock price today. (Round to the nearest dollar.)

$80

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

market where outstanding shares of stock are resold

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets?

primary

The constant-growth dividend model will provide invalid solutions when:

the growth rate of the stock exceeds the required rate of return for the stock.

Iron Mountain Inc has a common stock that just paid a dividend of $7 per share. If the required return is 0.3 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

$28.0

Kimco Realty Corp has a common stock that will pay a dividend of $6 per share next year. If the required return is 0.29 and the growth rate of firm is 0.08, find the common stock price today. (Round to the nearest dollar.)

$28.6

Incorrect

-In the general dividend-valuation model, the price of a share of stock is the future value of all expected future dividends. - Zero growth: Dividend pattern for common stock of a company shows growth over time. - Common stock: Owners of common stock are guaranteed dividend payments by the firm. -Common-stock holders have unlimited liability. -When the security markets are not efficient and the current market prices of securities do not reflect all available information relevant to the valuation of those securities, the security prices will be near or at their true (intrinsic) value. -Legally, common stockholders have unlimited liability; that is, their losses are not limited to the original amount of their investment in the firm, and their personal assets can be taken to satisfy the obligations of the corporation. -Failure to pay dividends on preferred stocks will result in a default. -Legally, common stockholders have unlimited liability. -Common stock represents the interest payments and principal claim in a corporation. -(TRUE or FALSE?) The constant-growth stock has constant amount of dividends and does not grow over time. -(TRUE or FALSE?) Legally, common stockholders have unlimited liability; that is, their losses are not limited to the original amount of their investment in the firm, and their personal assets can be taken to satisfy the obligations of the corporation. -(TRUE or FALSE?) The constant-growth dividend model tells us that the current price of a share of stock is today's dividend multiplied by the difference between the discount rate and the dividend growth rate. -(TRUE or FALSE?) NASDAQ is a stock exchange market and have a physical location where trading takes place. -(TRUE or FALSE?) Common stock dividends are declared by the CEO of the firm, and the CEO may or may not decide to pay a cash dividend at a particular time. -(TRUE or FALSE?) The payments of preferred stock dividends are contractual obligations.

Correct

-Preferred stock represents ownership in a corporation and entitles the owner to a dividend, which must be paid before dividends are paid to common stockholders. -Preferred stock is legally a form of equity and preferred stock dividends are paid by the issuer with after-tax dollars. -For a company that has no growth, dividends stay constant over time. -In secondary markets, outstanding shares of stock are bought and sold among investors. -Legally, common stockholders have limited liability. -The payments of preferred stock dividends are not contractual obligations. -In secondary markets, outstanding shares of stock are bought and sold among investors. -Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy. -The bond valuation model cannot be used to value perpetual preferred stock. -(TRUE or FALSE?) Common stock represents the basic ownership claim in a corporation. -(TRUE or FALSE?) Common-stock holders have limited liability. -(TRUE or FALSE?) Common stock dividends are declared by the board of directors, and a board may or may not decide to pay a cash dividend at a particular time. -(TRUE or FALSE?) Owners of common stock are not guaranteed any dividend payments and have the lowest-priority claim on the firm's assets in the event of bankruptcy. -(TRUE or FALSE?) Preferred stock represents an ownership interest in the corporation, but as the name implies, preferred stock receives preferential treatment over common stock. -(TRUE or FALSE?) The constant-growth dividend model assumes that dividends will grow at a constant rate forever. -(TRUE or FALSE?) Preferred stockholders take precedence over common stockholders in the payment of dividends and in the distribution of corporate assets in the event of liquidation. -(TRUE or FALSE?) Preferred stock represents ownership in a corporation and entitles the owner to a dividend, which must be paid before dividends are paid to common stockholders.

Dun & Bradstreet Corp has a preferred stock paying a dividend of $4 and has a return of 0.38. Calculate the preferred stock price. (Round to the nearest dollar.)

ANSWER: P0 (preferred stock price today) =D/Rp=4/0.38=$10.53 where Rp is the required return on the preferred stock.

TE Connectivity Ltd. has a preferred stock paying a dividend of $4 and has a return of 0.5. Calculate the preferred stock price. (Round to the nearest dollar.)

ANSWER: P0 (preferred stock price today) =D/Rp=4/0.5=$8 where Rp is the required return on the preferred stock.

CME Group Inc has a preferred stock paying a dividend of $8 and has a return of 0.13. Calculate the preferred stock price. (Round to the nearest dollar.)

ANSWER: P0 (preferred stock price today) =D/Rp=8/0.13=$61.54 where Rp is the required return on the preferred stock.

Iron Mountain Inc has a common stock that just paid a dividend of $10 per share. If the required return is 0.16 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=10*(1+0.04)/(0.16-0.04)=$86.67

T Rowe Price Group Inc has a common stock that will pay a dividend of $12 per share in one year. If the required return is 0.27 and the growth rate of firm is 0.01, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=12*(1+0.01)/(0.27-0.01)=$46.62

AutoNation Inc has a common stock that just paid a dividend of $12 per share. If the required return is 0.24 and the growth rate of firm is 0.02, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=12*(1+0.02)/(0.24-0.02)=$55.64

Torchmark Corp has a common stock that just paid a dividend of $13 per share. If the required return is 0.29 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=13*(1+0.04)/(0.29-0.04)=$54.08

Newfield Exploration Co has a common stock that just paid a dividend of $15 per share. If the required return is 0.21 and the growth rate of firm is 0.03, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=15*(1+0.03)/(0.21-0.03)=$85.83

Owens-Illinois Inc has a common stock that just paid a dividend of $4 per share. If the required return is 0.29 and the growth rate of firm is 0.02, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D0*(1+g)/(R-g)=4*(1+0.02)/(0.29-0.02)=$15.11

Hershey Foods Corp has a common stock that will pay a dividend of $11 per share in one year. If the required return is 0.21 and the growth rate of firm is 0.04, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D1/(R-g)=11/(0.21-0.04)=$64.71

Monster Beverage Corp has a common stock that will pay a dividend of $5 per share next year. If the required return is 0.22 and the growth rate of firm is 0.03, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D1/(R-g)=5/(0.22-0.03)=$26.32

Air Products & Chemicals Inc has a common stock that will pay a dividend of $7 per share next year. If the required return is 0.11 and the growth rate of firm is 0.02, find the common stock price today. (Round to the nearest dollar.)

ANSWER: P0=D1/(R-g)=7/(0.11-0.02)=$77.78

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

Answer: P0 = 1.65/0.12 = $13.75

Which of the following is the most typical example of a zero-growth dividend stock?

The preferred stock of a utility company.

Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $0.12 a share. The following dividends will be $0.15, $0.20, $0.50, and $0.75 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent?

Answer: 0.12/(1.085^1)+0.15/(1.085^2)+0.20/(1.085^3)+0.50/(1.085^4)+0.75/(1.085^5)+(0.75*1.04/(0.085-0.04))/(1.085^5) = 12.78

Yesteryear Productions pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today. After that time, the company plans on paying a constant $0.75 a share annual dividend indefinitely. How much are you willing to pay to buy a share of this stock today if your required return is 11.6 percent?

Answer: 0.40/(1.116^1)+0.40/(1.116^2)+(0.75/0.116)/(1.116^2) = $4.22

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return?

Answer: 0.70*(1+0.025)/(0.10-0.025) = $9.57 PreviousNext

The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Answer: 28.16 = 1.35/(R-0.03) => R-0.03 = 1.35/28.16 => R = 7.79%

Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay to purchase stock in this company if your required rate of return is 13 percent?

Answer: 3.20*(1-0.10)/(0.13-(-0.10)) = $12.52

Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the dividend be six years from now?

Answer: D6 = 1.67*(1.0275)^6 = $1.97

Whistle Stop Trains pays a constant $16 dividend on its stock. The company will maintain this dividend for the next 14 years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 15 percent?

Answer: N=14 I/YR=15 PV=? PMT=16 FV=0 and find PV=$91.59

Zylo, Inc. preferred stock pays a $7.50 annual dividend. What is the maximum price you are willing to pay for one share of this stock today if your required return is 7.5 percent?

Answer: P0 = $7.50/0.075 = $100.00

Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and $1 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 10.8 percent rate of return on stocks of this type?

Answer: P0 = 0.45/(1.108^1)+0.60/(1.108^2)+1/(1.108^3)+(1.25/0.108)/(1.108^3) = $10.14

Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

Answer: P0 = 0.95*(1+0.026)/(0.13-0.026) = $9.37

KL Airlines paid an annual dividend of $1.18 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $1.50 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent?

Answer: P0 = 1.50/(1.105^1) + 1.75/(1.105^2) + 1.80/(1.105^3)+(1.50/0.105)/(1.105^3) = $14.71

Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return?

Answer: P0 = 1.75/(0.14-(-0.015)) = $11.29

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next 3 years, respectively. Beginning 4 years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth to you if you require a 12.5 percent rate of return on similar investments?

Answer: P0 = 3.80/(1.125^1)+4.10/(1.125^2)+4.25/(1.125^3)+(4.25*1.0325/(0.125-0.0325)/(1.125^3) = $42.92

Jefferson Mills just paid a dividend of $1.56 per share on its stock. The dividends are expected to grow at a constant rate of 8 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require a 15 percent rate of return?

Answer: P7 = 1.56*(1.08^8)/(0.15-0.08) = $41.25

The preferred stock of Rail Lines, Inc., pays an annual dividend of $12.25 and sells for $59.70 a share. What is the rate of return on this security?

Answer: R = $12.25/$59.70 = 20.52 percent

dividend yield

Next years div yield/ current stock price

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

What are the distributions to shareholders by a corporation called?

dividends

Preferred stock is sometimes treated like a debt security because:

preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.