Beginning five years from now, the dividend is expected to increase by 2% annually. What is one share of this stock worth to you if you require an 8% rate of return on similar investments? a. $15.62 b. $19.57 c. $21.21 d. $23.33 e. $25.98 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
b 86. The Red Bud Co. pays a constant dividend of $1.20 a share. The company announced today that they will continue to do this for another 3 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7%? a. $2.94 b. $3.15 c. $3.23 d. $3.44 e. $3.60 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
b 87. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today. After that time, the company plans on paying a constant $1 a share dividend indefinitely. How much are you willing to pay to buy a share of this stock if your required return is 14%? a. $4.82 b. $5.25 c. $5.39 d. $5.46 e. $5.58 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
a 88. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. You place a required rate of return of 16% on this particular stock given the company’s situation. What is one share of this stock worth to you today? a. $3.76 b. $4.08 c. $4.87 d. $5.13 e. $5.39 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
e 89. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid their first annual dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, they are planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.5%? a. $9.41 b. $11.40 c. $11.46 d. $11.93 e. $12.43 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
a 90. BC ‘n D just paid their annual dividend of $.60 a share. The projected dividends for the next
five years are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the dividends will be held constant at $1.40. What is this stock worth today at a 6% discount rate?
a. $20.48 b. $20.60 c. $21.02 d. $21.28 e. $21.43 Difficulty level: Challenge
DIFFERENTIAL GROWTH DIVIDENDS
b 91. Beaksley, Inc. is a very cyclical type of business which is reflected in their dividend policy. The
firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now, the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return, what is this stock worth today?
a. $34.03 b. $37.21 c. $43.78 d. $48.09 e. $53.18 Difficulty level: Challenge
NEGATIVE GROWTH
a 92. Last week, Railway Cabooses paid their annual dividend of $1.20 per share. The company has
been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?
a. $4.50 b. $7.71 c. $10.80 d. $15.60 e. $27.00
Difficulty level: Medium
NEGATIVE GROWTH
b 93. Nu-Tek, Inc. is expecting a period of intense growth so have decided to retain more of their
earnings to help finance that growth. As a result they are going to reduce their annual dividend by 10% a year for the next three years. After that they will maintain a constant dividend of $.70 a share. Last year, the company paid $1.80 per share. What is the market value of this stock if the required rate of return is 13%?
a. $6.79 b. $7.22 c. $8.22 d. $8.87 e. $9.01 Difficulty level: Challenge
NEGATIVE GROWTH
c 94. The Double Dip Co. is expecting their ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that they will be reducing their annual dividend by 5% a year for the next two years. After that, they will maintain a constant dividend of $1 a share. Last year, the company paid $1.40 per share. What is this stock worth to you if you require a 9% rate of return? a. $10.86 b. $11.11 c. $11.64 d. $12.98 e. $14.23 Difficulty level: Challenge
PREFERRED STOCK
d 95. Butterup’s ‘N More wants to offer some preferred stock that pays an annual dividend of $2.00 a
share. The company has determined that stocks with similar characteristics provide a 9% rate of return. What price should Butterup’s expect to receive per share for this stock offering?
a. $18.35 b. $20.00 c. $21.80 d. $22.22 e. $24.22 Difficulty level: Easy
PREFERRED STOCK
c 96. The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and sells for $20.24 a share. What is the rate of return on this security? a. 5.95% b. 7.08% c. 8.40% d. 11.90% e. 14.17%
Difficulty level: Easy
PREFERRED STOCK
a 97. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a constant 6.58% rate of return. The stock is currently priced at $45.60 a share. What is the amount of the dividend per share? a. $3.00 b. $3.15 c. $3.50 d. $3.54 e. $3.62 Difficulty level: Easy
PREFERRED STOCK
b 98. You want to earn a 12% rate of return. Panco, Inc. preferred stock pays a $4.50
annual dividend. What is the maximum price you are willing to pay for one share of this stock?
a. $32.50 b. $37.50 c. $39.00 d. $40.50 e. $45.00 Difficulty level: Medium
CONSTANT GROWTH STOCK VALUATION
d 99. Which of the following amounts is closest to what should be paid for Overland common stock?
Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The risk of this company suggests that future cash flows should be discounted at a rate of 11%.
a. $20.45 b. $21.48 c. $37.50 d. $39.38 e. $47.70 Difficulty level: Medium
STOCK VALUATION/PERPETUITY
b 100. What would be the maximum an investor should pay for the common stock of a firm that has
no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.
a. $ 9.52 b. $10.88 c. $12.24 d. $17.00 e. None of the above. Difficulty level: Easy
CONSTANT GROWTH STOCK VALUATION
e 101. Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just
paid dividends of $1. This growth rate is expected to continue. How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%. a. $20.00 b. $21.50 c. $34.75 d. $50.00 e. $51.50
Difficulty level: Medium
DIFFERENTIAL STOCK VALUATION
c 102. The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for
the next 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The price of the stock should be ____ .
a. $ 9.375 b. $17.05 c. $41.39 d. $59.80 e. $62.38 Difficulty level: Challenge
FORECASTED DIVIDEND PAYMENT
b 103. If a company paid a dividend of $0.40 last year and they are expected to grow at 7% for the
next 6 years and then grow at 4% thereafter the dividend expected in year 8 is ___ .
a. $ 0.63 b. $ 0.65 c. $ 0.68 d. $ 0.69 e. $ 0.74 Difficulty level: Medium
REQUIRED RETURN
c 104. The Lory Company had net earnings of $127,000 this past year. Dividends were paid of
$38,100 on the company's equity of $1,587,500. If Lory has 100,000 shares outstanding with a current market price of $11.625 per share, what is the required rate of return?
a. 4.2% b. 6% c. 9% d. 14% e. None of the above. Difficulty level: Medium
DIFFERENTIAL GROWTH VALUATION
b 105. Doctors-On-Call, a newly formed medical group, is currently paying dividends of $.50. These
dividends are expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter. What is the value of the stock if the appropriate discount rate is 12%?
a. $ 8.08