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Financial Management: Principles and Applications, 11e (Titman)
Chapter 10 Stock Valuation
1) The XYZ Company, whose common stock is currently selling for $40 per share, is expected to
pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on
XYZ is 14%, what growth rate in dividends must be expected?
A) 5%
B) 14%
C) 9%
D) 6%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
2) The expected rate of return on a share of common stock whose dividends are growing at a
constant rate (g) is which of the following?
A) (D1 + g)/Vc
B) D1/Vc + g
C) D1/g
D) D1/Vc
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
3) Green Company's common stock is currently selling at $24.00 per share. The company
recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this rate, what
is the stock's expected rate of return?
A) 4.08%
B) 8.00%
C) 12.00%
D) 8.80%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
1
Copyright © 2011 Pearson Education, Inc.
4) Common stockholders are essentially:
A) creditors of the firm.
B) managers of the firm.
C) owners of the firm.
D) all of the above.
Topic: 10.1 Common Stock
Keywords: voting rights
Principles: Principle 2: There Is a Risk-Return Tradeoff
5) Butler, Inc.'s return on equity is 17% and management retains 75% of earnings for investment
purposes. Based on this information, what will be the firm's growth rate?
A) 4.25%
B) 22.67%
C) 44.12%
D) 12.75%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
6) If a company has a return on equity of 25% and wants a growth rate of 10%, how much of
ROE should be retained?
A) 40%
B) 50%
C) 60%
D) 70%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
7) ________ gives minority shareholders more power to elect board of directors.
A) Preemptive right
B) Majority voting
C) Proxy fights
D) Cumulative voting
Topic: 10.1 Common Stock
Keywords: voting rights
Principles: Principle 4: Market Prices Reflect Information
2
Copyright © 2011 Pearson Education, Inc.
8) You are evaluating the purchase of Cellars, Inc. common stock that just paid a dividend of
$1.80. You expect the dividend to grow at a rate of 12% for the next three years. You plan to hold
the stock for three years and then sell it. You estimate that a required rate of return of 17.5% will
be adequate compensation for this investment. Calculate the present value of the expected
dividends. Round to the nearest $0.10.
A) $4.90
B) $11.50
C) $9.80
D) $6.10
Topic: 10.1 Common Stock
Keywords: agency
Principles: Principle 3: Cash Flows Are the Source of Value
9) You are evaluating the purchase of Holdings, Inc. common stock that just paid a dividend of
$1.80, and the dividend will be $1.80 per share per year for the next ten years. You plan to hold
the stock for three years and then sell it. You expect the price of the company's stock to rise to
17.5% will be adequate compensation for this investment. Calculate the present value of the
expected future stock price. Round to the nearest $.25.
A) $64.00
B) $55.25
C) $31.75
D) $103.00
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
10) CEO naming friends to the board of directors and paying them more than the norm is an
example of the:
A) agency problem.
B) preemptive right.
C) majority voting feature.
D) proxy fights.
Topic: 10.1 Common Stock
Keywords: agency
Principles: Principle 4: Market Prices Reflect Information
3
Copyright © 2011 Pearson Education, Inc.
11) Little Feet Shoe Co. just paid a dividend of $1.65 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 of per share of LFS stock.
A) $20.63
B) $21.24
C) $15.00
D) $55.00
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
12) Marshall Manufacturing has common stock which paid a dividend of $1.00 a share last year.
12%, how much are you willing to pay for the stock today?
A) $13.00
B) $15.00
C) $17.00
D) $19.00
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
13) Marble Corporation's ROE is 17%. Their dividend payout ratio is 20%. The last dividend,
just paid, was $2.58. If dividends are expected to grow by the company's sustainable growth rate
indefinitely, what is the current value of Marble common stock if its required return is 18%?
A) $14.33
B) $18.27
C) $47.67
D) $66.61
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
4
Copyright © 2011 Pearson Education, Inc.
14) Fris B. Corporation stock is currently selling for $42.86. It is expected to pay a dividend of
$3.00 at the end of the year. Dividends are expected to grow at a constant rate of 3% indefinitely.
Compute the required rate of return on FBC stock.
A) 10%
B) 33%
C) 7%
D) 4.3%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
15) You are evaluating the purchase of Cool Toys, Inc. common stock that just paid a dividend of
$1.80. You expect the dividend to grow at a rate of 12%, indefinitely. You estimate that a
required rate of return of 17.5% will be adequate compensation for this investment. Assuming
that your analysis is correct, what is the most that you would be willing to pay for the common
stock if you were to purchase it today? Round to the nearest $.01.
A) $36.65
B) $91.23
C) $51.55
D) $74.82
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
16) A stock currently sells for $63 per share, and the required return on the stock is 10%.
Assuming a growth rate of 5%, calculate the stock's last dividend paid.
A) $1
B) $3
C) $5
D) $7
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
5
Copyright © 2011 Pearson Education, Inc.
17) A decrease in the ________ will cause an increase in common stock value.
A) growth rate
B) required rate of return
C) last paid dividend
D) both B and C
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
18) Acme Consolidated has a return on equity of 12%. If Acme distributes 60% of earnings as
dividends, then we would expect the common shareholders' investment in the firm and the value
of the common stock to grow by:
A) 4.80%.
B) 7.20%.
C) 12%.
D) 6%.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
19) An investor is contemplating the purchase of common stock at the beginning of this year and
to hold the stock for one year. The investor expects the year-end dividend to be $2.00 and
expects a year-end price for the stock of $40. If this investor's required rate of return is 10%, then
the value of the stock to this investor is:
A) $36.36.
B) $38.18.
C) $33.06.
D) $34.88.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
6
Copyright © 2011 Pearson Education, Inc.
20) A firm just paid $2.00 on its common stock and expects to continue paying dividends, which
are expected to grow 5% each year, from now to infinity. If the required rate of return for this
stock is 9%, then the value of the stock is:
A) $50.00.
B) $40.00.
C) $54.50.
D) $52.50.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
21) An issue of common stock currently sells for $40.00 per share, has an expected dividend to
5% per year. The expected rate of return on this security is:
A) 5%.
B) 10.25%.
C) 13.11%.
D) 10%.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
22) White Sink, Inc. just paid a dividend of $5.55 per share on its common stock, and the firm is
expected to generate constant growth of 12.25% over the foreseeable future. The common stock
is currently selling for $73.75 per share. The firm's dividend payout ratio is 40%, and White's
marginal tax rate is 40%. What is the rate of return that common stockholders expect? Round to
the nearest 0.1%.
A) 8.5%
B) 20.7%
C) 15.5%
D) 4.8%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
7
Copyright © 2011 Pearson Education, Inc.
23) KDP's most recent dividend was $2.00 per share and is selling today in the market for $70.
The dividend is expected to grow at a rate of 7% per year for the foreseeable future. If the market
return is 10% on investments with comparable risk, should you purchase the stock?
A) No, because the stock is overpriced $1.33.
B) No, because the stock is overpriced $3.33.
C) Yes, because the stock is underpriced $1.33.
D) Yes, because the stock is underpriced $3.33.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
24) An issue of common stock currently sells for $50.00 per share, has an expected dividend to
5% per year. If investors' required rate of return for this particular security is 12% per year, then
this security is:
A) overvalued and offering an expected return higher than the required return.
B) undervalued and offering an expected return higher than the required return.
C) overvalued and offering an expected return lower than the required return.
D) undervalued and offering an expected return lower than the required return.
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
25) You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is
selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the
dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth
rate of dividends.
A) 3%
B) 5%
C) 8%
D) 10%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
8
Copyright © 2011 Pearson Education, Inc.
26) ABC, Inc. just paid a dividend of $2. ABC expects dividends to grow at 10%. The return on
stocks like ABC, Inc. is typically around 12%. What is the most you would pay for a share of
ABC stock?
A) $100
B) $110
C) $120
D) $130
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
27) Marjen, Inc. just paid a dividend of $5. Marjen stock currently sells for $73.57. The return on
stocks like Marjen, Inc. is around 10%. What is the implied growth rate of dividends.
A) 1%
B) 3%
C) 5%
D) 7%
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 3: Cash Flows Are the Source of Value
28) Which investor incurs the greatest risk?
A) Mortgage bondholder
B) Preferred stockholder
C) Common stockholder
D) Debenture bondholder
Topic: 10.1 Common Stock
Keywords: market required yield
Principles: Principle 2: There Is a Risk-Return Tradeoff
29) What allows common stockholders the right to cast a number of votes equal to the number of
directors being elected?
A) The majority voting provision
B) The casting feature
C) The cumulative voting provision
D) The proxy method
Topic: 10.1 Common Stock
Keywords: voting rights
Principles: Principle 4: Market Prices Reflect Information
9
Copyright © 2011 Pearson Education, Inc.
30) The shareholder can cast all votes for a single candidate or split them among various
candidates through:
A) proxy fights.
B) cumulative voting.
C) call provisions.
D) majority voting.
Topic: 10.1 Common Stock
Keywords: voting rights
Principles: Principle 4: Market Prices Reflect Information
31) You are considering the purchase of common stock that just paid a dividend of $6.50 per
share. Security analysts agree with top management in projecting steady growth of 12% in
dividends and earnings over the foreseeable future. Your required rate of return for stocks of this
type is 18%. How much should you expect to pay for this stock?
A) $86
B) $94
C) $108
D) $121
E) $242
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 4: Market Prices Reflect Information
32) You are considering the purchase of Wahoo, Inc. The firm just paid a dividend of $4.20 per
share. The stock is selling for $115 per share. Security analysts agree with top management in
projecting steady growth of 12% in dividends and earnings over the foreseeable future. Your
required rate of return for stocks of this type is 17.5%. If you were to purchase and hold the stock
for three years, what would the expected dividends be worth today?
A) $12.60
B) $9.21
C) $17.12
D) $15.55
E) $11.46
Topic: 10.1 Common Stock
Keywords: dividend growth
Principles: Principle 1: Money Has a Time Value
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