FI 632 Chapter 8

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 share of this stock today?

$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

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?

$18.33`

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

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

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

You are considering a stock that is expected to pay dividends during the next five years of $0.50, $0,52, $0,54, $0,56 and $0.58. You estimate that you can sell the stock for $100 at the end of five years. Your required rate of return is 15% and the stock is currently selling for $65. If you purchase the stock, what rate of return do you expect to earn? Enter your answer in decimal format, using more than two decimal places.

0.097

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 percentR = [$2.62(1.038)]/$28.12 + .038 R = .1347, or 13.47%

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

You are considering a stock that you believe will pay dividends for the next three years of $1.10, $1.15 and $1.21. You believe that you could sell the stock at the end of three years for $58. Your required rate of return is 12%. What is the stock worth to you? Enter the answer as a positive number with two decimal places and no dollar sign.

44.04

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%

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

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

a decrease in which of the following will increase the current value of a stock according to the dividend growth model

discount rate

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

dividends

a forward PE is based on:

estimated future earnings

Supernormal growth is a growth rate that

is unsustainable over the long term

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

next year's

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

order flow

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

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

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