978-0133423822 Chapter 10 Part 1

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 10 Stock Valuation

10.1 Common Stock

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%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

4) Common stockholders are essentially

A) creditors of the irm.

B) managers of the irm.

C) owners of the irm.

D) all of the above.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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 irm’s growth rate?

A) 4.25%

B) 22.67%

C) 44.12%

D) 12.75%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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 ights

D) Cumulative voting

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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.

A) $4.91

B) $5.40

C) $9.80

D) $6.80

Question Status: Revised

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

9) You are evaluating the purchase of Charbridge, Inc. common stock which currently pays

no dividend and is not expected to do so for many years. Because of rapidly growing sales

and proits, you believe the stock will be worth $51.50 in 3 years. If your required rate of

return is 16%, what is the stock worth today?

A) $59.74

B) $51.25

C) $32.99

D) $0.00 because stocks that do not pay dividends have no value.

Question Status: New question

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

10) CEOs 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 ights.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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% indeinitely. 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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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. You expect the stock to grow at 5% per year. If the appropriate rate of return on this

stock is 12%, how much are you willing to pay for the stock today?

A) $13.00

B) $15.00

C) $17.00

D) $19.00

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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 indeinitely, 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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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%

indeinitely. Compute the required rate of return on FBC stock.

A) 10%

B) 33%

C) 7%

D) 4.3%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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%, indeinitely. 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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

18) Acme Consolidated has a return on equity of 12%. If Acme distributes 60% of earnings

as dividends, its expected growth rate will be

A) new 4.80%.

B) 7.20%.

C) 12%.

D) 6%.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

20) A irm 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 ininity. 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.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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 be paid at the end of the year of $2.00 per share, and has an expected growth

rate to ininity of 5% per year. The expected rate of return on this security is

A) 5%.

B) 10.25%.

C) 13.11%.

D) 10%.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

22) Common shareholders have a claim on the company’s assets

A) at any time, equal to the value of their shares.

B) only after the claims of debtholders and preferred shareholders have been satisied.

C) after the claims of the preferred shareholders have been satisied, but before the debt

holders.

D) never. Common shareholders have no claim on the company’s assets.

Question Status: New question

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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 be paid at the end of the year of $2.50 per share, and has an expected growth

rate to ininity of 5% per year. If investors’ required rate of return for this particular

security is 12% per year, then this security is

A) overvalued and ofering an expected return higher than the required return.

B) undervalued and ofering an expected return higher than the required return.

C) overvalued and ofering an expected return lower than the required return.

D) undervalued and ofering an expected return lower than the required return.

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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%

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value

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

Question Status: Previous edition

Objective: 10.1 Identify the basic characteristics and features of common stock and use the

discounted cash low model to value common shares.

Keywords: common stock

Principles: Principle 3: Cash Flows Are the Source of Value