Finance Chapter 7

Fast Wheels Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return?

$9.00

The current price of Zebar is $32.00 and the current dividend is $0.60. What is an investor's required rate of return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?

10.03%

The P/E ratio indicates _____.

how much investors are willing to pay for $1 of current earnings

The market value of common stock is primarily based on _____.

the firm's future earnings

HiGlo's common stock sells for $23.50, and its earnings are expected to grow at a rate of 12% annually. What is the current dividend (Do) for an investor who requires a 15% return?

$0.63

Keeping Pace Enterprises, makers of track and field equipment, has common stock that sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

$1.45

Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?

$10

What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on similar investments is 18%. (Round the growth rate to the nearest whole percent.) YEARDIVIDENDS2014$2.502013$2.482012$2.362011$2.32

$17

High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13% rate of return, what is the current dividend?

$2.50

During the past 8 years, Beef Wellington Cattle Company's common stock dividends have grown from $2.00 to $3.19. Estimate the compound annual dividend growth rate over the 8-year period.

6%

In the constant growth dividend valuation model, it is assumed that the ____.

firm's future dividend payments are expected to grow at a constant rate forever

In stock quotations, the last column, showing the net change, indicates the net change in _____.

the closing price from the previous day's close

An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following EXCEPT _____.

the firm's new product marketing decisions

In a reverse stock split, ____.

the number of shares are decreased

During the past 7 years, Burger Flippin' Corp.'s earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Flippin's common stock to an investor who requires a 16% rate of return?

$111.15

What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOV's current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent.

$25.68

Assume that the dividend ($3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.

$27.08

Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of Allegro's common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years.

$41.86

Moonshine Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Moonshine's common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the company's common stock to an investor who requires a 13 percent rate of return on these securities.

$46.22

During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years.

$67.50

During the past 10 years, Saturn's common stock dividends have grown from $0.24 to $0.62. If the past growth of dividends is expected to continue at the same rate in the future, what is the current value of Saturn's common stock to an investor who requires an 18% rate of return?

$8.53

By-Your-Leave Travel Agency has reported the dividends listed below. What return could be expected? The price of the stock is $18. (Round the growth rate to the nearest whole percent.) YearsDividends2010$1.122011$1.152012$1.182013$1.212014$1.24

10.11%

The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor's required rate of return is 14 percent?

10.75%

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investor's required rate of return on Zero-Sum if the current price is $12?

12%

King of the Roost Chicken Farms has issued the following dividends. What would be the growth rate in dividends (rounded)? YEARSDIVIDENDS2014$3.002013$2.502012$1.752011$1.54

25%

AVIX has 6.8 million shares outstanding and the firm's charter provides for a majority voting procedure. The company has seven directors up for reelection. What is the minimum number of shares needed to ensure the election of one director?

3,400,001

If Night Owl Lamps pays an annual dividend of $1.54, has a PE of 13, and its last closing price was 40, then its dividend yield must be _____.

3.85%

Quantum Inc. has 5.4 million shares outstanding, and the firm's charter provides for cumulative voting. The company has a twelve-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to ensure the election of one director?

415,386

Bellbottom Gongs, Inc. pays a quarterly dividend of $0.70, has a PE ratio of 14, and closed yesterday at $48.25. What is the dividend yield?

5.8%

What is the rate of return to an investor in the stock of Bajo Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25.

6.04%

Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

6.40%

Helix common stock currently sells for $30, and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?

9.5%

Direct issuance costs are _____.

All of these choices are correct. Higher for common stock than for preferred stock issues, dependent on the size of the issue, etc.

A firm may use a stock repurchase ____.

All of these choices are correct. to dispose of excess cash, to reduce takeover risk, etc.

Which of the following are reasons a large multinational corporation might sell equity in international markets rather than selling stock only in the country in which they are domiciled?

Global equity offerings resulting in higher price per share

Which of the following is NOT a characteristic of common stock?

It has claims on assets prior to those of preferred stock.

____ result in what is known as treasury stock.

Stock repurchases

What is the current value of a share of ABC common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years.

The constant growth rate model cannot be used because the growth rate is greater than the required rate of return.

In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a favorable price in each of the following cases EXCEPT _____.

a best efforts offering

Stockholders' equity includes _____.

both preferred stock and common stock

The returns investors receive from holding common stocks may be in two forms. They are ____.

cash dividends and stock dividends

All of the following statements about common stock are correct EXCEPT _____.

common stock is callable

In a liquidation of a firm due to bankruptcy, whose claims are considered last?

common stockholders

Many regulated companies are required by their regulatory commissions to sell new security issues via _____.

competitive bidding

All of the following are reasons that companies hold treasury stock EXCEPT ______.

compliance with SEC regulations that a certain amount of company shares must be kept by the company

Which one of the following is NOT a reason a firm may decide to repurchase its own stock?

disposition of excess warrants

When evaluating a firm based on price/earnings multiples, the evaluator must determine the price/earnings multiple for _____.

firms in the same industry

The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant _______.

forever

The constant growth dividend valuation model does not hold when _____.

g is greater than ke

In the constant growth dividend valuation model, the required rate of return must be ____ the dividend growth rate in order for the formula price to be meaningful.

greater than

Management usually opposes cumulative voting because this type of voting _____.

makes it easier for stockholders with minority viewpoints to elect sympathetic board members

Common stockholders have a number of general rights, including all of the following EXCEPT ____.

management rights

A common stock's book value is calculated _____.

on the basis of balance sheet figures

In addition to direct costs, there are other costs associated with new security offerings. These other costs include all of the following EXCEPT _____.

overpricing

Of the following common stock rights, which allows common stockholders to buy more shares of common stock in order to retain their pro-rata share of ownership in the company?

preemptive rights

Which of the four common stockholder rights exists in only a minority of firms?

preemptive rights

The zero growth method is used to value _____.

preferred stock

Standby underwriting is a procedure whereby an investment banker agrees to _____ during a rights offer.

purchase any shares not sold to rights holders

A rights offering (also called a privileged subscription) allows existing stockholders to _______.

purchase new shares of stock below market price

A ____ is a group of underwriters who agree to underwrite a new issue in order to spread the risk.

purchasing syndicate

Common stock dividends normally are paid _____.

quarterly

Which of the following is NOT an advantage of common stock financing?

relatively high flotation costs

A firm that wishes to raise additional equity capital by selling a portion of the existing owners' stock while maintaining control of the firm should consider a ____.

separate class of nonvoting stock

An option for selling securities reserved for larger firms (MVE > $150,000,000) whereby the firm files a master registration statement and then can sell small increments of the stock over the next two years by filing a short-form statement is called _____.

shelf registration

The book value per share of common stock is calculated by dividing ____ by the number of shares outstanding.

total common stockholders' equity

Stockholders' equity includes all of the following EXCEPT _____.

treasury stock

An arrangement whereby an investment banker agrees to purchase an entire new issue of securities is called ____.

underwriting

If Crafty Creatures Cage Maker stock sells for $18 per share and the firm nets $12 per share, the difference is called the ____.

underwriting spread

The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the _____.

underwriting spread

In the valuation of common stock, the simple annuity and perpetuity formulas used in the valuation of bonds and preferred stock are not generally applicable because _____.

unlike payments on most bonds and preferred stock, common stock dividends are normally expected to grow over time

Stock splits are a sign that the company ______.

wants to get its stock price to a more desirable trading level