Financial Management--chapter 8

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

dividend growth

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

$11.29 (1.75)/(.14-(-.015))

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% annual return?

$13.75 1.65/.12

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% annually. If you require a 13% rate of return, how much are you willing to pay to purchase one share of this stock today?

$9.37 (.95*(1+.026))/(.13-.026)

An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate

I, II, IV

Winston Co. has a dividend-paying stock with a total return for the year of -6.5%. Which one of the following must be true?

The stock has a negative capital gains yield

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect

a decrease in all stock values

Which one of the following is an underlying assumption of the dividend growth model?

a stock's value is equal to the discounted present value of the future cash flows which it generates

An agent who arranges a transaction between a buyer and seller of equity securities is called a

broker

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

capital gains yield

which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

common

An agent who maintains an inventory from which he or she buys and sells securities is called a

dealer

Which one of the following is computed by dividing next year's annual dividend by the current stock price

dividend yield

What are the distributions to shareholders by a corporation called?

dividends

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely

Supernormal growth is a growth rate that:

is unsustainable over the long term

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

market where outstanding shares of stock are resold

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen 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

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