Exam 8: The Valuation and Characteristics of Stock

You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday.You expect this stock to have a growth rate of 15 percent for the next 3 years,resulting in dividends of D₁=$2.30,D₂=$2.645,and D₃=$3.04.The long-run normal growth rate after year 3 is expected to be 10 percent (that is,a constant growth rate after year 3 of 10% per year forever).If you require a 14 percent rate of return,how much should you be willing to pay for this stock?

Beaver Corp preferred stock has a market price of $14.50.If it has a yearly dividend of $3.50,what is your expected rate of return if you purchase the stock at its market price?

The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

Kinard's Kennels Inc.ROE is 20%.Their dividend payout ratio is 70%.The last dividend,just paid,was $2.00.If dividends are expected to grow by the company's internal growth rate indefinitely,what is the current value of Kinard's common stock if its required return is 18%?

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

Nogrowth Corporation expects their dividend to stay at $0.50 per share each year into the foreseeable future.Therefore

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

The most relevant form of growth for valuing a firm's common stock is internal growth.

Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds.

A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.

Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever,the increase in the value of the stock each year should be equal to the

Which of the following is NOT true regarding common stock?

If the expected growth rate for dividends is zero,then the value of common stock will be equal to the current dividend.

ACME,Inc.expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future.Therefore,the value of the stock to an investor with a required return of 12% is

Studio 55,Inc.has an issue of preferred stock that pays a dividend of $4.00.The preferred stockholders require a rate of return on this stock of 9%.At what price should the preferred stock sell for? Round off to the nearest $0.10.

What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%?

Tannerly Worldwide's common stock is currently selling for $48 a share.If the expected dividend at the end of the year is $2.40 and last year's dividend was $2.00,what is the rate of return implicit in the current stock price?

Southland Tours has net income of $2 million this year.The book value of Southland Tours common equity is $8 million dollars.The company's dividend payout ratio is 60% and is expected to remain this way.What is Southland Tours' internal growth rate?

Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this stock?