Chapter 8 - Fundamentals of Fin and Acct

Worthy Ware pays a constant dividend of $1.46 per share. The company announced today that it will continue to pay the dividend for another 2 years and then in Year 3 it will pay a final liquidating dividend of $15.25 per share. What is one share of this stock worth today at a required return of 18.5 percent? - $11.44 - $13.09 - $12.07 - $12.92 - $14.20

- $11.44 P0 = $1.46/1.185 + $1.46/1.1852 + $15.25/1.1853 P0 = $11.44

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: - pay an increasing dividend for a period of time and then cease paying dividends altogether. - pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. - grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. - increase the dividend amount every other year. - pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

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

Ranch Services just paid its annual dividend of $2.50 per share. The dividends are expected to grow at 24 percent annually for the next 4 years and then level off to an annual growth rate of 7 percent indefinitely. What is the price of this stock today given a required return of 10.25 percent? - $144.74 - $158.24 - $145.24 - $148.09 - $135.48

- $145.24 P4 = [$2.50(1.244)(1.07)]/(.1025 − .07) P4 = $194.59 P0 = [{$2.50(1.24)]/1.1025} + {[$2.50(1.242)]/1.10252} + {[$2.50(1.243)]/1.10253} + {[$2.50(1.244) + $194.59]/1.10254} P0 = $145.24

Timber Company just paid its annual dividend of $3.82 and expects to reduce this payout by 6 percent each year indefinitely. What is the per share value of this stock if you require a return of 14.5 percent? - $17.52 - $18.27 - $39.15 - $42.24 - $34.79

- $17.52 P0 = [$3.82(1 − .06)]/(.145 + .06) P0 = $17.52

Shook Fitness pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 per share. What is the expected amount of the next dividend? - $2.32 - $2.24 - $2.37 - $2.29 - $2.17

- $2.29 $19.08 = D1/(.138 − .018) D1 = $2.29

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price? - $26.08 - $27.09 - $27.42 - $26.42 - $28.13

- $26.42 P0 = $2.08(12.7) P0 = $26.42

Elevation Systems, Incorporated, expects its dividends to grow at 25 percent per year for the next seven years before levelling off to a constant 3 percent growth rate. The required return is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05? - $44.36 - $38.93 - $39.96 - $32.11 - $43.21

- $43.21 P7 = [$1.05(1.25^7)(1.03)]/(.11 − .03) P7 = $64.46 P0 = [$1.05(1.25)/(.11 − .25)][1 − (1.25/1.11)7] + $64.46/1.117 P0 = $43.21

Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock? - $6.08 - $5.96 - $5.87 - $6.14 - $5.99

- $5.96 $54.80 = [D0(1.03)]/(.142 − .03)D0 = $5.96

A preferred stock pays an annual dividend of $7.95 and sells for $48.89 per share. What is the rate of return? - 6.84% - 6.15% - 7.95% - 9.54% - 16.26%

- 16.26% R = $7.95/$48.89 R = .1626, or 16.26%

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. - 1 - 2 - 0 - either 1, 2, or 3 - 3

- 3

Russell United has 28,500 shares of stock outstanding and has two open seats on its board of directors. Each share of common stock is granted one vote. How many additional votes are required to guarantee a seat on the board if the company were to use straight voting rather than cumulative voting? - 4,749 - 4,750 - 950 - 0 - 4,751

- 4,750 Votes requiredStraight = 28,500/2 + 1 Votes requiredStraight = 14,251 Votes requiredCumulative = 28,500/(2 + 1) + 1 Votes requiredCumulative = 9,501 Difference = 14,251 − 9,501 Difference = 4,750

Wang Restaurant Group will pay an annual dividend of $3.26 per share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 per share? - 9.13% - 9.44% - 9.63% - 8.46% - 6.83%

- 9.44% R = $3.26/$49.10 + .028 R = .0944, or 9.44%

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called? - Democratic - Deferred - Proxy - Straight - Cumulative

- Cumulative

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? - Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter - Decreasing dividends for six years followed by one final liquidating dividend payment - No dividends for five years, then increasing dividends forever - $1 per share annual dividend for two years, then $1.25 annual dividends forever - Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

- Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

A floor broker on the NYSE does which one of the following? - Trades for his or her own personal inventory - Executes orders on behalf of customers - Maintains an inventory and assumes the role of a market maker - Supervises the commission brokers of a specific financial firm - Is charged with maintaining a liquid, orderly market

- Executes orders on behalf of customers

Who can access Level 3 of Nasdaq's information? - Nasdaq market makers - Customers who pay an access fee - There is no Level 3. - Anyone with internet access - Only Nasdaq regulators

- Nasdaq market makers

Mockingbird Resources is expected to pay a dividend of $2.71 per share in one year. Thereafter, dividends will grow two percent per year forever. The current stock price is $19.60. If you require a return of 15 percent per year, should you buy the stock today? Why or why not? - Yes; The stock has a present value of $20.85 per share. - Yes; The stock has a present value of $18.43 per share. - No; The stock has a present value of $18.43 per share. - No; The stock has a present value of $20.85 per share. - No; The stock has a present value of $23.97 per share.

- Yes; The stock has a present value of $20.85 per share P0 = $2.71/(.15 − .02) P0 = $20.85

NYSE designated market makers: - are guaranteed a profit on every stock purchased and resold. - act as dealers. - execute trades on behalf of their clients. - provide a one-sided market. - are also referred to as "$2 brokers."

- act as dealers.

Which one of the following represents the capital gains yield as used in the dividend growth model? - P0 - g - g/P0 - D1/P0 - D1

- g

Supernormal growth is a growth rate that: - applies to a single, abnormal year. - is unsustainable over the long term. - exceeds a firm's previous year's rate of growth. - is both positive and follows a year or more of negative growth. - is generally constant for an infinite period of time

- is unsustainable over the long term.