Chapter 09 - Stock Valuation
20. The net present value of a growth opportunity, NPVGO, can be defined as: A. the initial investment necessary for a new project.
B. the net present value per share of an investment in a new project. C. a continual reinvestment of earnings when r < g. D. a single period investment when r > g. E. None of the above.
21. Angelina's made two announcements concerning its common stock today. First, the
company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the
maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return? A. $21.60 B. $22.46 C. $27.44 D. $34.62 E. $36.00
22. How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return? A. $19.23 B. $20.00 C. $20.40 D. $20.80 E. $21.63
23. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate discount rate is 14%? A. $7.14 B. $7.50 C. $11.11 D. $11.67 E. $12.25
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Chapter 09 - Stock Valuation
24. Majestic Homes' stock traditionally provides an 8% rate of return. The company just paid a $2 a year dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase? A. $48.60 B. $52.50 C. $55.13 D. $57.89 E. $70.00
25. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments? A. $10.00 B. $13.33 C. $16.67 D. $18.88 E. $20.00
26. Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to pay to buy one share today? A. $10.00 B. $13.33 C. $16.67 D. $18.88 E. $20.00
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Chapter 09 - Stock Valuation
27. The common stock of Eddie's Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock? A. 7% B. 9% C. 11% D. 13% E. 15%
28. The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10
dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock? A. 10.04% B. 16.07% C. 21.88% D. 43.75% E. 45.94%
29. Martha's Vineyard recently paid a $3.60 annual dividend on its common stock. This
dividend increases at an average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What is the market rate of return? A. 2.5% B. 3.5% C. 5.5% D. 6.0% E. 9.5%
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Chapter 09 - Stock Valuation
30. Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share? A. 9.5% B. 11.0% C. 12.5% D. 13.5% E. 15.0%
31. Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be: A. -4%. B. 4%. C. 8%. D. 12%. E. 20%.
32. The common stock of Grady Co. had an 11.25% rate of return last year. The dividend
amount was $.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation on the stock? A. 1.50% B. 8.00% C. 9.75% D. 11.25% E. 12.75%
33. Weisbro and Sons' common stock sells for $21 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 9%. What is the amount of the last dividend paid by Weisbro and Sons? A. $.77 B. $.80 C. $.84 D. $.87 E. $.88
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Chapter 09 - Stock Valuation
34. The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is the expected amount of the next dividend to be paid on Energizer's common stock? A. $.90 B. $1.00 C. $1.10 D. $1.21 E. $1.33
35. The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will the company's dividend be in six years? A. $0.90 B. $0.93 C. $1.04 D. $1.07 E. $1.11
36. A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this stock is 9%, what is the dividend amount? A. $1.40 B. $1.80 C. $2.20 D. $2.40 E. $2.80
37. You have decided that you would like to own some shares of GH Corp. but need an
expected 12% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend per share? A. $26.04 B. $29.17 C. $32.67 D. $34.29 E. $36.59
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