Finance ch 7

Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now. Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent? A. $7.70 B. $8.09 C. $8.29 D. $9.03 E. $9.34

A. $7.70

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent? A. $8.50 B. $9.67 C. $10.46 D. $12.23 E. $12.49

A. $8.50

The required return on Mountain Brook stock is 14 percent and the dividend growth rate is 5.5 percent. The stock is currently selling for $18.80 a share. What is the dividend yield? A. 7.50 percent B. 8.93 percent C. 9.75 percent D. 10.50 percent E. 12.50 percent

A. 7.50 percent Dividend yield = 0.13 - 0.055 = 7.5 percent

Solar Energy, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2 percent annually. How much are you willing to pay for one share of this stock if you require a 14 percent return? A. $15.14 B. $15.42 C. $15.78 D. $16.12 E. $16.62

B. $15.42 P0 = $1.85/(0.14 - 0.02) = $15.42

The Waffle House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 25 percent rate of return? A. $4.72 B. $5.00 C. $6.52 D. $6.63 E. $6.83

B. $5.00 P = $1.25/0.25 = $5.00

An agent who buys and sells securities from inventory is called a: A. floor trader. B. dealer. C. commission broker. D. broker. E. floor broker. Refer to Section 7.3.

B. dealer.

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting. A. simultaneous B. straight C. proxy D. cumulative E. sequential Refer to Section 7.2.

B. straight

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return? A. $12.56 B. $12.95 C. $13.31 D. $13.68 E. $14.07

C. $13.31 P0 = ($1.45 × 1.028)/(0.14 - 0.028) = $13.31

The common stock of The Garden of Eden is selling for $42 a share. The company pays a constant annual dividend and has a total return of 5.8 percent. What is the amount of the dividend? A. $1.02 B. $2.04 C. $2.44 D. $3.70 E. $6.81

C. $2.44 D = 0.058 × $42 = $2.44

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent? A. $17.71 B. $18.97 C. $20.50 D. $21.08 E. $21.69

C. $20.50

The Farmer's Market recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 10 percent? A. $23.57 B. $25.16 C. $26.21 D. $28.32 E. $30.18

C. $26.21

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7? A. ($1.10) (1.08 × 3) (1.02 × 4) B. ($1.10) (1.08 × 3) (1.02 × 3) C. ($1.10) (1.08)3 (1.02)4 D. ($1.10) (1.08)3 (1.02)3 E. ($1.10) (1.08)3 (1.02)2 Refer to Section 7.1.

C. ($1.10) (1.08)3 (1.02)4

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield? A. 4.13 percent B. 4.84 percent C. 5.21 percent D. 5.52 percent E. 5.78 percent

C. 5.21 percent Dividend yield = $2.40/$46.10 = 5.21 percent

Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return? A. 4.56 percent B. 5.39 percent C. 5.61 percent D. 6.63 percent E. 6.91 percent

C. 5.61 percent R = $1.60/$28.50 = 5.61 percent

Which one of the following types of securities has no priority in a bankruptcy proceeding? A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond Refer to Section 7.2.

C. Common stock

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting? A. Proxy B. Aggregate C. Cumulative D. Straight E. Condensed Refer to Section 7.2.

C. Cumulative

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year? A. (P0/D1) - g B. (D1/P0)/g C. Dividend yield + capital gains yield D. Dividend yield - capital gains yield E. Dividend yield × capital gains yield Refer to Section 7.1.

C. Dividend yield + capital gains yield

What is the market called that allows shareholders to resell their shares to other investors? A. Primary B. Proxy C. Secondary D. Inside E. Initial Refer to Section 7.3.

C. Secondary

Dividends are best defined as: A. cash payments to shareholders. B. cash payments to either bondholders or shareholders. C. cash or stock payments to shareholders. D. cash or stock payments to either bondholders or shareholders. E. distributions of stock to current shareholders. Refer to Section 7.2.

C. cash or stock payments to shareholders.

The dividend yield is defined as: A. the current annual cash dividend divided by the current market price per share. B. the current annual cash dividend divided by the current book value per share. C. next year's expected cash dividend divided by the current market price per share. D. next year's expected cash dividend divided by the current book value per share. E. next year's expected cash dividend divided by next year's expected market price per share. Refer to Section 7.1.

C. next year's expected cash dividend divided by the current market price per share.

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually? A. $1.50 × (1.02)1 B. $1.50 × (1.02)2 C. $1.50 × (1.02)3 D. $1.50 × (1.02)4 E. $1.50 × (1.02)5 Refer to Section 7.1.

D. $1.50 × (1.02)4

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5? A. $2.39 B. $2.41 C. $2.46 D. $2.53 E. $2.58

D. $2.53 D5= $2.20 × (1.028)5= $2.53

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred? A. Cumulative common B. Noncumulative common C. Noncumulative preferred D. Cumulative preferred E. Senior common Refer to Section 7.2.

D. Cumulative preferred

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount? A. Stock pricing model B. Equity pricing model C. Capital gain model D. Dividend growth model E. Present value model Refer to Section 7.1.

D. Dividend growth model

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's shares were voted? A. Straight B. Cumulative C. Consent-form D. Proxy E. In absentia Refer to Section 7.2.

D. Proxy

The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 15 percent? A. $27.64 B. $29.61 C. $30.66 D. $33.05 E. $33.93

E. $33.93

For the past six years, the price of Slippery Rock stock has been increasing at a rate of 9.6 percent a year. Currently, the stock is priced at $67 a share and has a required return of 14 percent. What is the dividend yield? A. 1.20 percent B. 2.75 percent C. 3.49 percent D. 4.28 percent E. 4.40 percent

E. 4.40 percent Dividend yield = 0.14 - 0.096 = 4.4 percent

The capital gains yield equals which one of the following? A. Total yield B. Current discount rate C. Market rate of return D. Dividend yield E. Dividend growth rate Refer to Section 7.1.

E. Dividend growth rate

Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Stated value C. Inside D. Secondary E. Primary Refer to Section 7.3.

E. Primary

A broker is an agent who: A. trades on the floor of an exchange for himself or herself. B. buys and sells from inventory. C. offers new securities for sale to dealers only. D. is ready to buy or sell at any time. E. brings buyers and sellers together. Refer to Section 7.3.

E. brings buyers and sellers together.