MODULE 4 QUIZ

Ace your homework & exams now with Quizwiz!

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10%, the price of the preferred stock will be

$5 ÷ 0.10 = $50 for preferred stocks, the zero-growth model is used because the preferred stock's dividend is fixed. The formula is V = D0/r, where D0 is the dividend and r is the required return. LO 4.3.1

Companies A and B have exactly the same dollar amount of assets and net income. Company A has a capitalization structure of 70% equity and 30% debt; Company B has a capitalization structure of 40% equity and 60% debt. Which of the following statements is CORRECT?

.All else being equal, a profitable company with a higher debt level will have a higher return on equity. If income is the same for both companies, then the only difference is the percentage of equity. With a lower equity, Company B will have a higher return on equity. EBITDA and ROA would be equal, and Company B has a higher debt-to-equity ratio. LO 4.2.2

All else remaining equal, if the dividend payout ratio decreases, the value of a company's common stock would

A decrease in the dividend payout ratio means that the earnings retention ratio (rr in the following formula) will increase. An increase in rr will cause an increase in g. When the higher g is inserted in the dividend discount model formula, the denominator decreases, thereby causing the value of the stock to increase. g = ROE × rr LO 4.2.2

What is the duration of a zero-coupon bond yielding 9%, maturing in 10 years, and selling for $422.41?

Because the bond is a zero-coupon bond, the duration must be 10 years. LO 4.1.2

Company A and Company B are in the same industry and have approximately the same dollar amount of assets and operating income. Company A has a return on equity (ROE) of 28% and Company B has an ROE of 12%. Which of the following statements best identifies the major difference causing the disparity in ROE between Company A and Company B?

Both depreciation expense and S, G & A expenses are used to obtain operating income, which is the same for both companies. Generally, the most significant factor in raising one company's ROE above another company's is the greater use of debt. The company having the greater percentage of debt, assuming the cost of the debt is less than the return earned from the debt proceeds, will have the highest ROE. LO 4.2.2

Robin purchased a 20-year bond with a duration of 11 years for $1,323.18. Which of these statements is CORRECT? A) The coupon rate is lower than the YTM, and the current yield should be higher than the coupon rate. B) The coupon rate is higher than the yield to maturity, and the YTM is higher than the current yield. C) The yield to maturity (YTM) is less than both the current yield and the coupon rate. D) The current yield is higher than both the coupon rate and the yield to maturity.

CR = coupon rate CY = current yield YTM = yield to maturity Premium bonds: CR > CY > YTM Par bonds: CR = CY = YTM Discount bonds: CR < CY < YTM Because the bond was purchased at a premium, the yield to maturity is less than both the current yield and the coupon rate. LO 4.1.1

Kevin owns a $1,000 par value corporate bond with three years remaining until maturity. This bond is currently trading for $1,020.91. The bond has a coupon rate of 4.5% (annual coupon payments) and a current YTM of 3.75%. What is the duration of this bond?

Divide the sum in the last column ($2,934.18) by the total PV/market price of the bond ($1,020.91) to derive the duration of 2.8741 years. Using a financial calculator with the following inputs: For year 1, FV = $45, I/YR = 3.75, N = 1, solve for PV. For year 2, change N to 2 without clearing your calculator and solve for PV. For year 3, FV = $1,045, I/YR = 3.75%, N = 3, solve for PV. LO 4.1.2

Which of the following are NOT used in technical analysis? A) Graphs B) Moving averages C) Supply and demand of stocks D) Financial statement ratios

Financial statement ratios are part of fundamental analysis. LO 4.2.1

Which of the following are NOT used in technical analysis? A) Graphs B) Moving averages C) Supply and demand of stocks D) Financial statement ratios

Financial statement ratios are part of fundamental analysis. LO 4.2.1

All of the following statements correctly illustrate bond relationships except A) higher-rated bonds have more price volatility than lower rated bonds. B) everything else being equal, the larger the coupon, the shorter the duration. C) bonds with longer durations are more affected by interest rate changes than bonds with shorter durations. D) long-term bonds are more affected by interest rate changes than short-term bonds.

Higher-rated bonds are less risky and are less volatile than lower rated bonds. LO 4.1.2

Which one of the following statements CORRECTLY matches a technical indicator to the information it provides in signaling a change from a bear to a bull market? A) Most financial advisers become bullish. B) A moving average chart indicates that actual prices have dropped through the average. C) Odd lot sales exceed purchases. D) Barron's Confidence Index indicates that the yield differential between low-quality bonds and high-quality bonds is decreasing.

In a bull market, there is less fear so there is a lower spread between high-quality and lower-quality bonds. LO 4.2.1

Interest rate changes have the greatest effect on

Long term bonds. The rule-of-thumb approach to measuring the estimated price change of a bond is to multiply the bond's duration by the estimated change in interest rates (for small rate changes—less than 1% or 100 basis points—only). Therefore, longer-term bonds have the greatest duration and the most price volatility. LO 4.1.1

Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable? A) A low P/E and a high price/sales ratio B) A high P/E and a high price/sales ratio C) A high P/E and a low price/sales ratio D) A low P/E and a low price/sales ratio

Low prices to either earnings or sales might indicate an undervalued stock. LO 4.3.2

Which of the following are factors used in industry analysis for investment purposes? Financial leverage Government rules and regulations Labor conditions Technological advances

Option I is not a factor used for industry analysis, but rather for company analysis. LO 4.2.1

Which of the following is an example of technical analysis? A) Debt as a percentage of total capital B) 39-week moving average of a company's stock prices C) Interest rate trends D) Growth rate of the industry of which a company is a part

The 39-week moving average is one technical indicator. LO 4.2.1

You are about to analyze a growth company that has chosen to retain all of its earnings for growth and has had a positive cash flow, but a negative earnings per share, for the past several years. Which of the following valuation approaches would you consider when analyzing the company? A) Constant growth dividend discount model B) Price-to-sales (P/S) ratio C) Price/earnings-to-growth (PEG) ratio D) Price-to-earnings (P/E) ratio

The P/S ratio is an indication of how much an investor is willing to pay for a specific revenue stream, in this case the company's annual sales. LO 4.3.2

Debbie owns a five-year AAA rated municipal bond with a coupon rate of 3.50% (paid semiannually). If the comparable yield for this quality bond is currently 2.75%, what is the present value of her bond?

The answer is $1,034.81. The present value of her bond is $1,034.81, calculated using the following inputs on a semiannual basis: N = 10 (5 x 2 periods per year) I/YR = 2.75% PMT = $17.50 (3.50% × 1,000 ÷ 2) FV = $1,000 Solve for PV = -1,034.81, or $1,034.81. LO 4.1.1

Amber purchased a bond for $1,038.90 exactly two years ago. At that time, the bond had a maturity of five years and a coupon rate of 10% (paid semiannually). Assuming the rates below are the prevailing rates for this type of bond at different maturities, calculate the price that Amber could sell her bond for today. Maturities1 year3 years5 years10 years30 yearsInterest rates6%7%8.5%10%12%

The answer is $1,079.93. Using the 3-year rate of 7% for the calculation on a semiannual basis: FV = $1,000 I/YR = 7% PMT = $50 (10% x 1000 = 100 ÷ 2) N = 6 (3 x 2 periods per year) PV = -1,079.9283, or $1,079.93 LO 4.1.1

Lou owns a stock that consistently pays a $1.50 dividend. If his required rate of return is 8.5%, what is the intrinsic value of the stock?

The answer is $17.65. Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 1.50 ÷ 0.085 = $17.65 LO 4.3.1

Caralla Foods produced before-tax earnings of $15 million last year. A large institutional investor has determined an appropriate capitalization for valuing this company is 8%. In addition, the risk-free rate of return is 5%. Based on this information, calculate the value of Caralla Foods using the discounted earnings model.

The answer is $187,500,000. The formula for the discounted earnings model: V = E ÷ RD = 15,000,000 ÷ 0.08 = 187,500,000 Using the discounted earnings method produces a current corporate valuation of $187,500,000. LO 4.3.1

Assume that ABC stock pays a dividend in the current year of $1.56 per share. The company's dividend is expected to grow by 1.5% per year. Calculate the stock's price if an investor has a required rate of return of 7%.

The answer is $28.79. The formula for the constant growth dividend discount model: V = D1 ÷ (r - g) Therefore, the intrinsic value of ABC stock equals $28.79 [(1.56 × 1.015) ÷ (0.07 - 0.015)]. LO 4.3.1

Jack is interested in purchasing LFM stock. LFM has an estimated free cash flow to equity (FCFE) for the next year of $2.75 per share, which is expected to grow at a constant rate of 3.5% per year. Jack's required rate of return is 12%. Using the FCFE valuation model, calculate the intrinsic value of LFM stock.

The answer is $32.35. Using the model V = FCFE1 ÷ (r - g), the intrinsic value of the stock is $32.35 [$2.75 ÷ (0.12 - 0.035)]. LO 4.3.1

Kinzie owns a stock that consistently pays a $.50 dividend. Assuming Kinzie's required rate of return is 9.5%, calculate the intrinsic value of the stock.

The answer is $5.26. Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 0.50 ÷ 0.095 = 5.2632, or $5.26 LO 4.3.1

Lawrence purchases a 20-year corporate bond with a coupon rate of 7.5% paid semiannually. Assuming the comparable yield for this type of bond is 9.5%, calculate the intrinsic value of his bond.

The answer is $822.37. Intrinsic value is calculated using the following inputs on a semiannual basis: N = 40 (20 x 2 periods per year) I/YR = 9.5% PMT = $37.50 (7.5% × 1,000 ÷ 2) FV = $1,000 Solve for PV = 822.37 or $822.37. LO 4.1.1

LJM Corporation has a bond issue with a coupon rate of 8% and seven years remaining until maturity. Assuming a par value of $1,000 and semiannual coupon payments, calculate the intrinsic value of the bond if current market conditions justify a 10% required rate of return.

The answer is $901.01. The intrinsic value of LJM's bond is $901.01, calculated using the following inputs on a semiannual basis: N = 14 (7 x 2 periods per year) 10% = I/YR 8% × $1,000 ÷ 2 = $40 = PMT $1,000 = FV Solve for PV = -901.01, or $901.01. LO 4.1.1

Springfield municipal bonds have 12 years remaining to maturity. The bonds pay interest semiannually at an annual coupon rate of 4.25%. The bonds have a yield to maturity of 5%. Calculate the current market price of these bonds.

The answer is $932.93. The current market price of these bonds is $932.93, calculated using the following inputs on a semiannual basis: FV = $1,000 PMT = 4.25% x 1000 ÷ 2 = $21.25 N = 24 (12 x 2 periods per year) I/YR = 5% Solve for PV = -932.9313, or $932.93 LO 4.1.1

DMM stock has a P/E ratio of 12 and is expected to have an expected growth rate of earnings of 6%. Based on this information, calculate the PEG ratio of DMM stock.

The answer is 2. The PEG ratio is calculated by dividing a company's P/E ratio by the firm's expected growth rate of earnings: PEG = P/E ÷ g. Therefore, the PEG of DMM stock is 2 (12 ÷ 6). DMM's ratio would then be compared to its peers to determine whether the stock is a good buy. LO 4.3.2

Given a required rate of return of 8%, a growth rate of 4%, a beta of 1.25, and a standard deviation of 2.5%, calculate the price-to-free-cash flow for this particular investment.

The answer is 26.0. The formula for price-to-free-cash flow: P/FCF = (1 + G) ÷ (r - g) = (1 + 0.04) ÷ (0.08 - 0.04) = 1.04 ÷ 0.04 = 26.0 After calculating this ratio, an investor would compare this P/FCF to other investments to see whether a purchase is warranted. LO 4.3.2

ABC Technologies, Inc., a publicly-traded company, uses both equity and debt to finance its operations. The company's stock is currently trading for $52.50 per share and has earnings of $1.50 per share. Calculate ABC's price-to-earnings (P/E) ratio.

The answer is 35. ABC Technologies, Inc. has a P/E ratio of 35 ($52.50 ÷ $1.50). LO 4.3.2

MLM Corporation exhibits an expected growth in earnings of 11% for the next year. If an investor's required rate of return is 14%, what is the firm's price-to-free-cash-flow (P/FCF) ratio?

The answer is 37.00. The firm's P/FCF ratio is 37.00, calculated as follows: (1 + 0.11) ÷ (0.14 - 0.11) = 37.00. After calculating this ratio, an investor would compare the result with the stock's peers to determine if a purchase is warranted. LO 4.3.2

LMN Company has assets of $250 million and $100 million in liabilities. For the past year the company earned $75 million, and paid out $10 million in dividends. What is the company's return on equity (ROE)?

The answer is 50%. $250,000,000 - $100,000,000 = $150,000,000 in equity. $75,000,000 profit ÷ $150,000,000 equity = 0.50, or 50% ROE. LO 4.2.2

Which of these statements concerning technical analysis is CORRECT? The focus of technical analysis is market timing with an emphasis on likely price changes. Technicians tend to concentrate on the past price movements to forecast future price movements. The focus of technical analysis is the process by which stock prices rapidly adjust to new information. Technical analysis is based on the underlying fundamentals of a stock's value.

The answer is I and II. Statements III and IV are not correct. Technicians tend to concentrate on the short run, looking for short-term price movements. The focus of technical analysis is the gradual process whereby stock prices adjust to new information. Fundamental analysis is based on the underlying fundamentals of a stock's value. Technical analysis involves analyzing past stock prices to forecast future prices. LO 4.2.1

Lynn and Stuart Wagman are a middle-aged couple who would like to add an equity investment to their portfolio. They require a 12% rate of return and are considering the purchase of one of these common stocks: Stock 1: Dividends currently are $1.50 annually and are expected to increase 8% annually; market price = $35. Stock 2: Dividends currently are $2.25 annually and are expected to increase 7% annually; market price = $50. Using the dividend growth model, determine which stock would be more appropriate for the Wagmans to purchase at this time.

The answer is Stock 1, because the expected return on investment is great than the Wagmans' required return. Compute the intrinsic value and expected return first, then determine which stock should be purchased. The intrinsic value of Stock 1 is $40.50; of Stock 2, $48.15. The expected return on investment of Stock 1 is 12.6%; of Stock 2, 11.8%. Stock 1 has a D0 of $1.50, thus D1 is ($1.50 x 1.08) or $1.62. Current market price is stated as $35 and the stated growth rate is 8%. ($1.62/$35) + .08 = 12.63% expected return for Stock 1. Stock 2 has a D0 of $2.25, thus D1 is ($2.25 x 1.07) or $2.4075. Current market price is stated as $50 and the stated growth is 7%. ($2.4075/$50) + .07 =11.8% expected return for Stock 2. LO 4.3.1

Which of these best describes the concept of convexity?

The answer is a measure of the curvature of the relationship between a bond's YTM and its market price (value). Specifically, convexity helps explain the change in bond prices not accounted for simply by the bond's duration; in other words, convexity gives us a more precise measure of the change in the price of a bond, given a respective change in market interest rates. LO 4.1.2

The use of P/E ratios to select stocks suggests which of these? A) High P/E stocks should be purchased. B) Low P/E ratio stocks are overvalued. C) A stock should be purchased if it is selling near its historic high P/E. D) A stock should be purchased if it is selling near its historic low P/E.

The answer is a stock should be purchased if it is selling near its historic low P/E. While purchasing stocks near their historically high P/E ratio could continue to represent value, a much better time would be to purchase stocks that are at their historic low ratios. LO 4.3.2

All of the following statements correctly illustrate convexity and duration relationships except A) convexity has an inverse relationship with the coupon rate. B) convexity has a direct relationship with the yield to maturity. C) duration has an inverse relationship with the yield to maturity. D) duration has an inverse relationship with the coupon rate.

The answer is convexity has a direct relationship with the yield to maturity. Convexity has an inverse relationship with yield to maturity. Convexity relationships are the same as those for duration. LO 4.1.2

Which of these statements best describes the concept of bond duration? A) Duration measures the extent to which two variables move together, either positively (together) or negatively (opposite). B) Duration is used as an estimate of the change in the price of a bond given a negative one percentage point change in mortgage rates. C) Duration assumes the price of a bond will stay constant because the market price of the underlying stock stays constant. D) Duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollars.

The answer is duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollars. Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite). Duration is a measure of the sensitivity of a bond's price to changes in interest rates. LO 4.1.2

Which of these choices correctly illustrates the relationship between a bond's price and various yields? A) For a premium bond: coupon rate > yield to maturity > current yield B) For a discount bond: yield to maturity > coupon rate > current yield C) For a premium bond: current yield > yield to maturity > coupon rate D) For a discount bond: coupon rate < current yield < yield to maturity

The answer is for a discount bond: coupon rate < current yield < yield to maturity. When a bond trades at a discount, its yield to maturity will be greater than its current yield, which will be greater than its coupon rate. LO 4.1.1

Which one of these conclusions regarding fundamental analysis will an investor reach if he or she believes in the weak form of the efficient market hypothesis?

The answer is fundamental analysis can be used to identify undervalued securities. An investor subscribing to the weak form of the EMH believes that fundamental analysis can be used to identify undervalued securities. LO 4.2.1

Which of these valuation methods is the most appropriate to use when analyzing a stock? A) P/E ratio B) Multiple methods C) Dividend discount model D) Non-constant dividend growth model

The answer is multiple methods. No single equity valuation method should be used alone—an analyst should use various valuation methods and compare the results of each. LO 4.3.2

PQR stock has a current dividend of $1.75 that has been growing at a constant rate of 8% per year. If the stock is currently selling for $100 and your required rate of return is 10%, would you buy the stock at today's price?

The answer is no, because the stock is overvalued on the basis of the constant growth dividend discount model. On the basis of the constant growth dividend discount model, the intrinsic value of XYZ stock is $94.50, calculated as follows: D0(1 + g) ÷ (r - g) = $1.75(1.08) ÷ (0.10 - 0.08) = $94.50. Because XYZ stock is currently selling for $100 per share, it is overvalued in the market and the investor should not buy the stock. LO 4.3.2

The technical analysis approach suggests that future stock prices are forecasted by

The answer is past stock prices. Past stock price movements are used by technicians to forecast future price movements. LO 4.2.1

Which of the following bond strategies should not be recommended if an investor expects interest rates to increase?

The answer is sell low-duration bonds and buy longer duration bonds. Prices decline when interest rates rise. An investor expecting an increase in interest rates should sell more volatile bonds and purchase less volatile bonds. Bonds with large coupons and short durations are less price volatile than low-coupon, long-term, and long duration bonds.

All of these statements explain the attributes of technical analysis except

The answer is technical analysts rely heavily on financial ratios in their analysis of stocks. Analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements. LO 4.2.1

When a company issues long-term debt securities instead of common stock, which one of these outcomes is the company most likely trying to achieve? A) To increase the company's taxable income B) To increase the company's fixed asset turnover rate C) To increase the company's return on equity D) To increase the company's financial risk

The answer is to increase the company's return on equity. When debt, instead of equity capital, is issued by a company, its shareholder's equity portion of the balance sheet remains constant. If the additional capital raised increases net income, then return on equity will rise, and the company will see a positive effect from the issuance of debt. Leverage, properly employed, helps a company increase its return on equity. LO 4.2.2

Yvette is saving for her son's college education. Her son is expected to start college in 8 years. Choose the bond portfolio that would most likely be immunized with respect to this goal.

The answer is weighted average time to maturity of bonds is 10 years with coupon of 5%. To immunize the portfolio, the duration of the portfolio should match the investor's time horizon. Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations equal to their time to maturity. LO 4.1.2

If all of these bonds are of similar credit risk, choose which will be the least sensitive to interest rate changes. A) Zero-coupon bond maturing in eight years B) 8% coupon bond maturing in six years C) Zero-coupon bond maturing in six months D) 3% coupon bond maturing in six years

The answer is zero-coupon bond maturing in six months. Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations that are equal to their time to maturity. Bonds with shorter durations are less sensitive to changes in interest rates. Thus, the six-month zero-coupon bond is the least sensitive to changes in interest rates. LO 4.1.2

All of the following statements concerning security valuation and analysis are CORRECT except A) for successful security analysis, it is necessary to understand the characteristics of and the factors that affect various securities. B) value is a function of the expected future returns on a security and the associated risk. C) the intrinsic value of a security is the future value of expected future cash flows inflated at an appropriate risk-free rate, without taking the risk of the investment into consideration. D) for successful security analysis, a valuation model is applied to securities to estimate their price, or value.

The intrinsic value of a security is the present value of expected future cash flows discounted at an appropriate discount rate, taking the risk of the investment into consideration. LO 4.3.1

Assume a $1,000 par value bond with three years until maturity is currently trading for $1,027.23. The bond has a coupon rate of 6% (annual coupon payments) and a current YTM of 5%. The bond has a duration of 2.51 years. Calculate what the new market price for the bond would be if the YTM changed from 5% to 4.5%.

The new price of the bond should be $1,041.23. Using a financial calculator, use the following inputs for semiannual payments: FV = $1,000 PMT = $1,000 x 6% = $60/2 = $30 I/YR = 4.5% N = 6 (3 x 2 periods per year) Solve for PV = -1,041.6586, or $1,041.66 LO 4.1.1

Juliet owns a PRT Inc. bond with a par value of $1,000. PRT is a AA rated bond maturing in seven years. Juliet receives $55 of interest income from PRT semiannually. Comparable debt, i.e., AA rated, seven-year maturity, yields 12%. The bond's duration is five years. Assume the Fed is concerned about inflation and increases the discount rate. As a consequence, market interest rates on seven-year AA rated bonds change from 12% to 13%. How will the price of Juliet's bond change?

The price will decrease by approximately 5%. When interest rates change by 1%, the approximate price change of a bond will be the bond's duration multiplied by the rate change. The bond's duration can be seven years only if it is a zero-coupon bond. No information in the facts states that it is a zero-coupon bond. The facts do state that the bond has a coupon. Therefore, its duration will be less than seven years. The only other indicated possibility is a five-year duration. So, a five-year duration multiplied by an interest rate change of 1% results in a price change of 5%. Because rates rose, the price of the bond must decrease.

You are considering purchase of a stock that is currently selling for $23 and pays a dividend of $1.15 per share. The dividend is expected to grow at a rate of 15% per year for the next three years. After that, the dividend is expected to grow at a constant rate of 8%. Your required return is 13%. The maximum price you should pay for this stock is

The value is calculated on the HP 10bII+ by solving for the NPV of uneven cash flows as follows: 13 I/YR 0 CF0 1.3225 CF1 1.5209 CF2 1.7490 + 37.7784 CF3 29.7559 SHIFT, NPV The 37.7784 is calculated from the constant growth DDM, starting at the end of the third year: [1.7490(1.08)] ÷ (0.13 - 0.08) = 37.7784 LO 4.3.1

Kristy has a fixed-income portfolio that consists of three individual bonds. FMV Duration Bond A $5,000 5.0 Bond B $3,000 8.0 Bond C $2,000 12.0 What is the duration of Kristy's portfolio?

The weighted duration of Kristy's portfolio is 7.3, calculated as follows: FMV Duration Product Bond A $5,000 5.0 $25,000 Bond B $3,000 8.0 $24,000 Bond C $2,000 12.0 $24,000 Total $10,000 $73,000 portfolio duration = $73,000 ÷ $10,000 = 7.3 LO 4.1.2

Which of the following statements regarding fundamental and technical analysis is CORRECT? A) Investors looking for excellent companies to invest in may use bottom-up analysis, which is a form of technical analysis. B) Technical analysis is not considered valid under the efficient market hypothesis, because this type of analysis is attempting to predict future prices based on past price movement. C) Fundamental analysis may result in better returns than the overall market under both the weak and semistrong forms of the efficient market hypothesis. D) In top-down analysis, an investor would start by researching various industries, and then choose stocks within that industry.

This is correct, as any form of EMH does not coexist with technical analysis. LO 4.2.1

Tate is considering the purchase of a stock that just paid a dividend of $0.30 in the last quarter. That dividend has been steady for all of the past year. The company is expected to grow the dividend at 15% per year for the next three years, after which it is expected to grow at a constant rate of 8%. The required return is 11%. What is the maximum price Tate should pay for this stock? (Select the closest answer.)

Using the three-step approach, first determine the dividend at the end of each of the first three years. The amount of $0.30 is a quarterly dividend and must be multiplied by 4 to get $1.20 for the current annual dividend. This amount is multiplied by 1.15 for each year in order to get: Year Dividend 1 1.38 2 1.587 3 1.8251 Next determine the value of the stock at the end of year 3 based on the dividend at the end of year 4: [1.8251(1.08)] ÷ (0.11 - 0.08) = 65.70 Using the CFj keys on the calculator (with dividends rounded), solve as follows: 11 I/YR 0 CF0 1.38 CF1 1.59 CF2 1.83 + 65.70 CF3 51.91 SHIFT, NPV LO 4.3.1 PrevSUBMITNext


Related study sets

BUS-107 Contemporary Business Law Ch. 26

View Set

Prep U for Brunner and Suddarth's Textbook of Medical Surgical Nursing, 13th Edition Chapter 36: Management of Patients With Immunodeficiency Disorders

View Set

Philosophy final (Test 1 and Test 2 Questions)

View Set

Finance 320 Final Quiz Questions First 2 chapters

View Set

PHILIPPINE ELECTRICAL CODE (PEC 2017)

View Set

AUDIT Chapter 3 - Audit Reports (Textbook Questions)

View Set

Machine Learning Foundations for Product Managers

View Set