Question 1

The discount rate in equity valuation is composed entirely of:

Accepted Answer

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. 
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.

Question 2

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%.

Accepted Answer

A)  $9.52 
B)  $10.88 
C)  $12.24 
D)  $17.00 
E)  None of these. 
A)  $9.52 
B)  $10.88 
C)  $12.24 
D)  $17.00 
E)  None of these.

Question 3

Beaksley,Inc. is a very cyclical type of business which is reflected in its 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?

Accepted Answer

A)  $34.03 
B)  $37.21 
C)  $43.78 
D)  $48.09 
E)  $53.18 
A)  $34.03 
B)  $37.21 
C)  $43.78 
D)  $48.09 
E)  $53.18

Question 4

Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend?

Accepted Answer

A)  5.2% 
B)  5.5% 
C)  5.9% 
D)  6.0% 
E)  6.3% 
A)  5.2% 
B)  5.5% 
C)  5.9% 
D)  6.0% 
E)  6.3%

Question 5

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

Accepted Answer

A)  dual class 
B)  cumulative 
C)  deferred 
D)  preferred 
E)  common 
A)  dual class 
B)  cumulative 
C)  deferred 
D)  preferred 
E)  common

Question 6

The common stock of Eddie's Engines,Inc. sells for $20 a share. The stock is expected to pay $2 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?

Accepted Answer

A)  14% 
B)  14.4% 
C)  15% 
D)  17% 
E)  19% 
A)  14% 
B)  14.4% 
C)  15% 
D)  17% 
E)  19%

Question 7

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%?

Accepted Answer

A)  $17.04 
B)  $22.39 
C)  $26.57 
D)  $29.08 
E)  $33.71 
A)  $17.04 
B)  $22.39 
C)  $26.57 
D)  $29.08 
E)  $33.71

Question 8

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?

Accepted Answer

A)  1.50% 
B)  8.00% 
C)  9.75% 
D)  11.25% 
E)  12.75% 
A)  1.50% 
B)  8.00% 
C)  9.75% 
D)  11.25% 
E)  12.75%

Question 9

Can't Hold Me Back,Inc. is preparing to pay its first dividends. It is 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?

Accepted Answer

A)  $7.20 
B)  $14.48 
C)  $18.88 
D)  $21.78 
E)  $25.06 
A)  $7.20 
B)  $14.48 
C)  $18.88 
D)  $21.78 
E)  $25.06

Question 10

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?

Accepted Answer

A)  $0.90 
B)  $0.93 
C)  $1.04 
D)  $1.07 
E)  $1.11 
A)  $0.90 
B)  $0.93 
C)  $1.04 
D)  $1.07 
E)  $1.11

Question 11

A stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

Accepted Answer

A)  $17.20 
B)  $17.90 
C)  $18.20 
D)  $19.40 
E)  $19.75 
A)  $17.20 
B)  $17.90 
C)  $18.20 
D)  $19.40 
E)  $19.75

Question 12

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?

Accepted Answer

A)  $48.60 
B)  $52.50 
C)  $55.13 
D)  $57.89 
E)  $70.00 
A)  $48.60 
B)  $52.50 
C)  $55.13 
D)  $57.89 
E)  $70.00

Question 13

Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid its 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,it is 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%?

Accepted Answer

A)  $9.41 
B)  $11.40 
C)  $11.46 
D)  $11.93 
E)  $12.43 
A)  $9.41 
B)  $11.40 
C)  $11.46 
D)  $11.93 
E)  $12.43

Question 14

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 required rate of return is 11%.

Accepted Answer

A)  $20.45 
B)  $21.48 
C)  $37.50 
D)  $39.38 
E)  $47.70 
A)  $20.45 
B)  $21.48 
C)  $37.50 
D)  $39.38 
E)  $47.70

Question 15

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:

Accepted Answer

A)  -4%. 
B)  4%. 
C)  8%. 
D)  12%. 
E)  20%. 
A)  -4%. 
B)  4%. 
C)  8%. 
D)  12%. 
E)  20%.

Question 16

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

Accepted Answer

A)  current 
B)  total 
C)  dividend 
D)  capital gains 
E)  earnings 
A)  current 
B)  total 
C)  dividend 
D)  capital gains 
E)  earnings

Question 17

Payments made by a corporation to its shareholders,in the form of either cash,stock or payments in kind,are called:

Accepted Answer

A)  retained earnings. 
B)  net income. 
C)  dividends. 
D)  redistributions. 
E)  infused equity. 
A)  retained earnings. 
B)  net income. 
C)  dividends. 
D)  redistributions. 
E)  infused equity.

Question 18

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?

Accepted Answer

A)  $.90 
B)  $1.00 
C)  $1.10 
D)  $1.21 
E)  $1.33 
A)  $.90 
B)  $1.00 
C)  $1.10 
D)  $1.21 
E)  $1.33

Question 19

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.

Accepted Answer

A)  $114.60 
B)  $119.43 
C)  $124.20 
D)  $129.50 
E)  $138.75 
A)  $114.60 
B)  $119.43 
C)  $124.20 
D)  $129.50 
E)  $138.75

Question 20

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?

Accepted Answer

A)  $26.04 
B)  $29.17 
C)  $32.67 
D)  $34.29 
E)  $36.59 
A)  $26.04 
B)  $29.17 
C)  $32.67 
D)  $34.29 
E)  $36.59

Exam 9: Stock Valuation

The discount rate in equity valuation is composed entirely of:

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%.

Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend?

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

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?

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 stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

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 required rate of return is 11%.

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:

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

Payments made by a corporation to its shareholders,in the form of either cash,stock or payments in kind,are called:

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?

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.

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?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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