Eddie’s has established a pattern of increasing their 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% Difficulty level: Medium
REQUIRED RETURN
a 66. 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% Difficulty level: Medium
REQUIRED RETURN
e 67. Martha’s Vineyard recently paid a $3.60 annual dividend on their 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% Difficulty level: Medium
REQUIRED RETURN
d 68. Bet’R Bilt Bikes just announced that their 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% Difficulty level: Medium
DIVIDEND YIELD VS. CAPITAL GAINS YIELD
b 69. 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%. Difficulty level: Medium
CAPITAL GAIN
c 70. The common stock of Grady Co. returned 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% Difficulty level: Easy
DIVIDEND AMOUNT
b 71. 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 Difficulty level: Medium
DIVIDEND AMOUNT
d 72. 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 Difficulty level: Medium
DIVIDEND AMOUNT
d 73. The Reading Co. has adopted a policy of increasing the annual dividend on their common stock
at a constant rate of 3% annually. The last dividend they paid was $0.90 a share. What will their dividend be in six years?
a. $.90 b. $.93 c. $1.04
d. $1.07 e. $1.11 Difficulty level: Medium
CONSTANT DIVIDEND
e 74. A stock pays a constant annual dividend and sells for $31.11 a share. If the rate of return on this
stock is 9%, what is the dividend amount?
a. $1.40 b. $1.80 c. $2.20 d. $2.40 e. $2.80 Difficulty level: Medium
CONSTANT DIVIDEND
b 75. 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 Difficulty level: Medium
GROWTH DIVIDEND
e 76. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid their annual dividend of $1.20. What is the rate of growth of their dividend? a. 5.2% b. 5.5% c. 5.9% d. 6.0% e. 6.3% Difficulty level: Medium
GROWTH DIVIDEND
c 77. B&K Enterprises will pay an annual dividend of $2.08 a share on their common stock next week. Last year, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8 %? a. $71.16 b. $74.01 c. $76.97 d. $80.05
e. $83.25 Difficulty level: Challenge
GROWTH DIVIDEND
d 78. Wilbert’s Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5% annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. If you desire a 10% rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading costs. a. $1,640 b. $1,681 c. $1,723 d. $1,766 e. $1,810 Difficulty level: Medium
GROWTH DIVIDEND
b 79. The Merriweather Co. just announced that they are increasing their annual dividend to $1.60 and establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will one share of this stock be worth five years from now if the required rate of return is 12%? a. $21.60 b. $22.36 c. $23.14 d. $23.95 e. $24.79 Difficulty level: Medium
GROWTH DIVIDEND
b 80. Shares of the Katydid Co. common stock are currently selling for $27.73. The last dividend paid was $1.60 per share. The market rate of return is 10%. At what rate is the dividend growing? a. 2.50% b. 4.00% c. 5.98% d. 13.05% e. 14.91% Difficulty level: Medium
DIFFERENTIAL GROWTH
c 81. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share of this stock if the required rate of return is 9.25%? a. $35.63
b. $38.19 c. $41.05 d. $43.19 e. $45.81 Difficulty level: Challenge
DIFFERENTIAL GROWTH
c 82. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rate of return is 15%? a. $17.04 b. $22.39 c. $26.57 d. $29.08 e. $33.71 Difficulty level: Challenge
DIFFERENTIAL GROWTH
d 83. Can’t Hold Me Back, Inc. is preparing to pay their first dividends. They are
going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that,
the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?
a. $7.20 b. $14.48 c. $18.88 d. $21.78 e. $25.06 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
c 84. NU YU announced today that they will begin paying annual dividends. The first dividend will be paid next year in the amount of $.25 a share. The following dividends will be $.40, $.60, and $.75 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.5% per year. How much are you willing to pay to buy one share of this stock if your desired rate of return is 12 %? a. $1.45 b. $5.80 c. $7.25 d. $9.06 e. $10.58 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
b 85. Now or Later, Inc. recently paid $1.10 as an annual dividend. Future dividends are projected at $1.14, $1.18, $1.22, and $1.25 over the next four years, respectively.