Chapter 09 - Stock Valuation
14. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased
shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return. A. remain constant B. decrease by 5% C. increase by 5% D. increase by 10% E. increase by 15%
Difficulty level: Medium
Topic: DIVIDEND YIELD AND CAPITAL GAINS Type: CONCEPTS
15. The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A. must always show a current liability of $1,000 for dividends payable. B. is obligated to continue paying $1 per share per year.
C. will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.
D. has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E. must still declare each dividend before it becomes an actual company liability.
Difficulty level: Medium Topic: DIVIDENDS Type: CONCEPTS
16. The value of common stock today depends on:
A. the expected future holding period and the discount rate. B. the expected future dividends and the capital gains.
C. the expected future dividends, capital gains and the discount rate. D. the expected future holding period and capital gains. E. None of the above.
Difficulty level: Medium
Topic: COMMON STOCK VALUES Type: CONCEPTS
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Chapter 09 - Stock Valuation
17. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct?
A. The closing price on the previous day was $1.42 higher than today's closing price. B. A dealer will buy the stock at $22.87 and sell it at $26 a share.
C. The stock increased in value between yesterday's close and today's close by $.0142. D. The earnings per share are equal to 1/26th of $22.87. E. The earnings per share have increased by $1.42 this year.
Difficulty level: Medium
Topic: STOCK MARKET REPORTING Type: CONCEPTS
18. A stock listing contains the following information: P/E 17.5, closing price 33.10,
dividend .80, YTD% chg 3.4, and net chg - .50. Which of the following statements are correct given this information?
I. The stock price has increased by 3.4% during the current year. II. The closing price on the previous trading day was $32.60. III. The earnings per share are approximately $1.89. IV. The current yield is 17.5%. A. I and II only B. I and III only C. II and III only D. III and IV only E. I, III, and IV only
Difficulty level: Medium Topic: STOCK QUOTE Type: CONCEPTS
19. The discount rate in equity valuation is composed entirely of: A. the dividends paid and the capital gains yield. B. the dividend yield and the growth rate. C. the dividends paid and the growth rate.
D. the capital gains earned and the growth rate. E. the capital gains earned and the dividends paid.
Difficulty level: Medium Topic: DISCOUNT RATE Type: CONCEPTS
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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.
Difficulty level: Medium Topic: NPVGO Type: CONCEPTS
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
Difficulty level: Easy
Topic: STOCK VALUE - CONSTANT GROWTH Type: PROBLEMS
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Chapter 09 - Stock Valuation
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
Difficulty level: Easy
Topic: STOCK VALUE - CONSTANT GROWTH Type: PROBLEMS
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
Difficulty level: Easy
Topic: STOCK VALUE - CONSTANT GROWTH Type: PROBLEMS
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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
Difficulty level: Easy
Topic: STOCK VALUE - CONSTANT GROWTH Type: PROBLEMS
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
Difficulty level: Easy
Topic: STOCK VALUE - ZERO GROWTH Type: PROBLEMS
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