Exam 8: The Valuation and Characteristics of Stock

Using the dividend valuation method,an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14.Based on this information,which of the following statements is most accurate?

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?

Historically,price appreciation,or capital gains yield,has accounted for a greater portion of returns on common stocks than dividend payments.

Butler Corp paid a dividend today of $5 per share.The dividend is expected to grow at a constant rate of 6.5% per year.If Butler Corp stock is selling for $50.00 per share,the stockholders' expected rate of return is

Shareholders,as owners of the corporation,face unlimited liability for the corporation's debts,while bondholders,as creditors,may only lose the value of their investment if the company goes bankrupt.

For a given constant required rate of return,the greatest portion of a preferred stockholder's return comes from increases in the price of preferred stock.

Common stock does not mature.

A small biotechnology research corporation has been experiencing losses for the first three years of its existence,and thus has a negative balance in retained earnings.The corporation's stock price,however,is $1 per share.Which of the following statements is most correct?

The common stock of a constant-growth firm is valued in the same manner as its preferred stock.

Because common stock represents a residual interest in the corporation,the value of common stock is equal to the total firm value less the firm's outstanding debt.

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.

A sinking-fund provision allows for the retirement of a portion of preferred stock each year.

Department 65 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.

Positive Tronics Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share.It presently sells for $87 per share.What do investors require as a rate of return on this stock? Round off to the nearest .10%.

Given the constant growth dividend valuation model,the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

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

H)J.Corp.common stock paid $2.50 in dividends last year (D₀).Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,what is the stock's expected rate of return (nearest .01 percent)?

The change in the value of a corporation's common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

Which of the following statements concerning the required rate of return on stocks is true?

Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.