Exam 8: The Valuation and Characteristics of Stock

Wallace Industries paid a dividend of $1.65 on its common stock yesterday.The dividends of Wallace Industries are expected to grow at 9% per year indefinitely.If the risk free rate is 3% and investors' risk premium on this stock is 8%,estimate the value of Wallace Industries stock 2 years from now.

Shara Miselle Co.just paid a dividend of $1.65 (D₀)on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value per share of Shara Miselle stock.

ADR Bank preferred stock pays an annual dividend of $2.75 per share.If the stock is currently selling for $27.50 per share,what is the expected rate of return on this stock?

Which of the following statements concerning the constant growth dividend valuation model is true?

Lily 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.If the required rate of return on this stock is 15.5%,compute the current value per share of Lily Co.stock.

If two firms have the same current dividend and the same expected growth rate,their stocks must sell at the same current price or else the market will not be in equilibrium.

The price of DDS Corporation stock is expected to be $45 in 5 years.Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00.If your required rate of return is 15 percent,how much are you willing to pay for DDS stock?

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

United Financial Corp had a return on equity of 15%.The corporation's earnings per share was $6.00,its dividend payout ratio was 40% and its profit-retention rate was 60%.If these relationships continue,what will be United Financial Corp's internal growth rate?

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

In general,common stock and preferred stock are both valued by calculating the present value of all expected future cash flows,using the required return as the discount rate.

Preferred stock valuation usually treats the preferred stock as a

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

XYZ Corp 8% preferred stock with a par value of $100 and a market price of $150 will pay an annual dividend this year of $12 per share.

A common stock with an expected dividend growth rate of zero would be valued in the same way as preferred stock,that is,the expected dividend divided by the required return.

The stock valuation model D₁/(r_cs - g)requires the stock to grow at a rate greater than the required return; otherwise,the stock is worthless.

Modem Development,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years,at which point the stock is expected to sell for $56.00.If investors require a rate of return on Modem's common stock of 18%,what should the stock sell for today?

You are considering the purchase of Zee Company stock.You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year.You believe that you can sell the stock for $20.00 per share two years from now.If your required rate of return is 10 percent,what is the maximum price that you would pay for a share of Zee Company stock?

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

Yanti Corp.preferred stock has a 5% stated dividend percentage,and a $100 par value.What is the value of the stock if your required rate of return is 6% per year?