FINN 3226 CH. 8

B

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today? a. $40.85 b. $41.69 c. $39.83 d. $37.86 e. $38.83

E

Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return? a. 8.24% b. 8.67% c. 8.45% d. 8.03% e. 8.89%

A

Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value? a. $44.87 b. $43.75 c. $45.99 d. $42.65 e. $41.59

E

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell? a. $104.27 b. $106.95 c. $109.69 d. $112.50 e. $115.38

A

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a. Some class or classes of common stock are entitled to more votes per share than other classes. b. All firms have several classes of common stock. c. All common stocks fall into one of three classes: A, B, and C. d. All common stock, regardless of class, must pay the same dividend. e. All common stocks, regardless of class, must have the same voting rights.

B

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price? a. $30.36 b. $28.90 c. $31.12 d. $29.62 e. $31.90

E

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then a. the expected return must be equal to both the required future return and the past realized return. b. the expected future return must be less than the most recent past realized return. c. the required return must equal the realized return in all periods. d. the past realized return must be equal to the expected return during the same period. e. the expected future returns must be equal to the required return.

E

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium. a. The expected return on the stock is 5% a year. b. The price of the stock is expected to decline in the future. c. The stock's required return must be equal to or less than 5%. d. The stock's dividend yield is 5%. e. The stock's price one year from now is expected to be 5% above the current price.

E

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0? a. $0.95 b. $1.27 c. $1.40 d. $1.16 e. $1.05

B

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price? a. $41.58 b. $42.64 c. $43.71 d. $44.80 e. $45.92

B

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6.0% a. The stock's required return is 10%. b. The stock's expected dividend yield and growth rate are equal. c. The stock's expected dividend yield is 5%. d. The stock's expected capital gains yield is 5%. e. The stock's expected price 10 years from now is $100.00.

B

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9% a. These two stocks must have the same expected year-end dividend. b. These two stocks must have the same dividend yield. c. These two stocks must have the same expected capital gains yield. d. These two stocks should have the same price. e. These two stocks should have the same expected return.

A

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta 1.10 0.90 Constant growth rate 7.00% 7.00% a. Stock A must have a higher dividend yield than Stock B. b. Stock A must have a higher stock price than Stock B. c. Stock B must have the higher required return. d. Stock B could have the higher expected return. e. Stock B's dividend yield equals its expected dividend growth rate.

A

The preemptive right is important to shareholders because it a. protects the current shareholders against a dilution of their ownership interests. b. allows managers to buy additional shares below the current market price. c. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. d. is included in every corporate charter. e. will result in higher dividends per share.

E

Which of the following statements is CORRECT? a. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. c. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. d. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. e. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

C

You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think a. the stock should be sold. b. dividends are not likely to be declared. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. the stock is experiencing supernormal growth.