978-0134083285 Chapter 8 Part 3

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27) Backford Company just paid a dividend yesterday of $2.25 per share. The company‘s stock is

currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%.

What is the growth rate expected for Backford Company dividends assuming constant growth?

A) 9.47%

B) 9.89%

C) 10.87%

D) 11.81%

Keywords: Constant Growth Dividend Valuation Model, Growth Rate

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

28) TellTrue Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share.

TellTrue also has common stock which paid a dividend in 2009 of $5. Which of the following statements

is MOST correct concerning TellTrue stock?

A) The price of the preferred stock should equal the price of the common stock since the dividends are

the same.

B) The price of the common stock could be higher than the price of the preferred stock if the common

stock dividends are expected to grow in the future.

C) The price of the preferred stock is expected to be higher than the price of the common stock because

the required return on preferred stock is higher than the required return on common stock.

D) If the required return on the preferred stock is the same as the required return on the common stock,

then the price of preferred stock should equal the price of the common stock if markets are efficient.

Keywords: Preferred Stock Valuation, Common Stock Valuation

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

29) 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?

A) Company B must be riskier than Company A, and risk requires a reward.

B) Other things being equal, if Company A and Company B have the same firm value, Company B must

have more debt, thus leveraging its returns for the benefit of shareholders.

C) Other things being equal, if Company A and Company B have the same firm value, Company A may

have more shares of stock outstanding than Company B.

D) Company B’s required rate of return is higher than Company A’s required return.

Keywords: Free Cash Flow Valuation

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

30) All of the following affect the value of a share of common stock EXCEPT

A) the dollar amount of the dividends.

B) investors’ required rate of return.

C) the future growth rate for dividends.

D) the stock and paid-in-capital amounts on the balance sheet.

Keywords: Common Stock Valuation, Balance Sheet, Required Return, Dividends

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

31) The Western State Company‘s common stock is expected to pay a $2.00 dividend in the coming year.

If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the

market price of the stock be?

A) $11.76

B) $24.00

C) $23.11

D) $22.22

Keywords: Constant Growth Dividend Valuation Model, Common Stock

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

32) An example of the growth factor in common stock is

A) acquiring a loan to fund an investment in Asia.

B) retaining profits in order to reinvest into the firm.

C) issuing new stock to provide capital for future growth.

D) two strong companies merging together to increase their economy of scale.

Keywords: Growth Rate, Common Stock, Retained Profits

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

33) You are considering the purchase of a share of Ranch’s common stock. You expect to sell it at the end

of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. Ranch just paid a

dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to

pay for it now?

A) $28.57

B) $33.05

C) $20.83

D) $30.80

Keywords: Common Stock Valuation, Dividend, Required Return

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

34) 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. If the required rate of return on this stock is

15.5%, compute the current value per share of Bensen Co. stock.

A) $81.38

B) $76.43

C) $56.23

D) $43.90

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

35) 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?

A) No, the market price is above the intrinsic value of the stock.

B) Yes, the market price is below the intrinsic value of the stock.

C) No, the growth rate in dividends is too far below the required return.

D) Yes, but only if you can keep the stock for at least 5 years.

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

36) Dynamic 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.

A) $106.84

B) $100.43

C) $91.81

D) $54.71

Keywords: Constant Growth Dividend Valuation Model, Required Return, Risk-Free Rate, Risk Premium

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

37) 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?

A) 6%

B) 9%

C) 10%

D) 15%

Keywords: Sustainable Growth Rate

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

38) Shackleford Corporation net income this year is $800,000. The company generally retains 35% of net

income for reinvestment. The company’s common equity currently has a book value of $5,000,000. They

just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of

this stock if dividends are expected to continue growing indefinitely at the company‘s internal growth

rate.

A) $22.61

B) $11.42

C) $15.63

D) $4.35

Keywords: Internal Growth Rate, Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

39) 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%?

A) $17.67

B) $16.89

C) $14.92

D) $11.52

Keywords: Internal Growth Rate, Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

40) Beaver Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the

end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the

required rate of return on Beaver Corporation stock.

A) 12.48%

B) 15.65%

C) 13.64%

D) 16.12%

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

41) Waterfront Solutions, 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 Waterfront’s common stock of 18%,

what should the stock sell for today?

A) $50.22

B) $48.51

C) $44.76

D) $40.22

Keywords: Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

42) If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends

along the way, and if your required rate of return is 16% per year, how much is the stock worth today?

A) $42.68

B) $48.05

C) $51.10

D) $74.64

Keywords: Common Stock Valuation, Present Value

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

43) Distant Thunder, Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends

are expected to grow at a constant rate of 10% for the next two years, at which point the dividends will

begin to grow at a constant rate indefinitely. If the stock is selling for $50 today and the required return is

15%, what it the expected annual dividend growth rate after year two?

A) 3.365%

B) 3.878%

C) 4.556%

D) 5.000%

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

44) Shasta 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 Shasta stock.

A) $20.63

B) $21.24

C) $15.00

D) $55.00

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

45) You observe Thundering Herd Common Stock selling for $40.00 per share. The next dividend is

expected to be $4.00, and is expected to grow at a 5% annual rate forever. If your required rate of return is

12%, should you purchase the stock?

A) yes, because the present value of the expected future cash flows is greater than $40

B) no, because the present value of the expected future cash flows is less than $40

C) yes, because the present value of the expected future cash flows is less than $40

D) no, because the present value of the expected future cash flows is greater than $40

Keywords: Common Stock Valuation, Required Return

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking