978-0134083285 Chapter 8 Part 4

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46) Castle, Inc. paid a dividend yesterday of $2 per share. Castle management expects the dividend to

increase next year to $3 annually. If the dividend is expected to stay at $3 per year for the foreseeable

future, what is the value of the stock to an investor with a required rate of return of 10%?

A) $7.50

B) $30.00

C) $32.00

D) $50.00

Keywords: Dividend Valuation Model, Zero Growth

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

47) Diana Ltd. paid a $2.50 per share dividend yesterday. The dividend is expected to grow at 10 percent

per year for the foreseeable future. Diana Ltd. has a beta of 1.6, a standard deviation of returns of 30

percent, and a required return of 18%. What is the value of a share of Diana Ltd. common stock?

Keywords: Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

48) 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?

Keywords: Common Stock Valuation

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

49) 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?

Keywords: Common Stock Valuation

Learning Obj.: L.O. 8.4

AACSB: Analytical Thinking

50) How does internal growth versus the infusion of new capital affect the original shareholders?

Keywords: Common Stock Valuation

Learning Obj.: L.O. 8.4

AACSB: Reflective Thinking

Learning Objective 8.5

1) The expected rate of return implied by a given market price equals the required rate of return for

investors at the margin.

Keywords: Required Return, Expected Return

Learning Obj.: L.O. 8.5

AACSB: Reflective Thinking

2) An investor’s required rate of return for a common stock can be estimated by summing the stock’s

dividend yield and annual growth rate, assuming the growth rate is constant over time.

Keywords: Required Return, Dividend Yield, Growth Rate, Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.5

AACSB: Reflective Thinking

3) 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.

Keywords: Constant Growth Dividend Valuation Model, Capital Gains Yield

Learning Obj.: L.O. 8.5

AACSB: Reflective Thinking

4) TC 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 TC Corp. stock is selling for $50.00 per share, the stockholders’ expected rate of return is

A) 11.50%.

B) 13.56%.

C) 15.49%.

D) 16.50%.

Keywords: Expected Rate of Return, Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

5) 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, where D1 is the next dividend and Vc is the current value of the stock?

A) (D1 + g)/Vc

B) D1/Vc + g

C) D1/g

D) D1/g + Vc

Keywords: Constant Growth Dividend Valuation Model, Expected Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

6) Beaver Corp. preferred stock has a market price of $14.50. If it has a yearly dividend of $3.50, what is

your expected rate of return if you purchase the stock at its market price?

A) 41.43%

B) 19.45%

C) 22.36%

D) 24.14%

Keywords: Preferred Stock, Expected Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

7) South Stage, Inc. 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?

A) 2.75%

B) 10.0%

C) 17.5%

D) 27.5%

Keywords: Preferred Stock, Expected Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

8) Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at

a 12-percent annual rate forever. If Jackson‘s current market price is $40.00, what is the stock’s expected

rate of return (nearest .01 percent)?

A) 5.50%

B) 11.00%

C) 18.25%

D) 19.00%

Keywords: Constant Growth Dividend Valuation Model, Expected Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

9) Crandle‘s common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends

are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Crandle’s stock?

A) 11.11%

B) 11.76%

C) 12.2%

D) 14.21%

Keywords: Required Return, Constant Growth Dividend Valuation Model

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

10) Bevel Building Products, Inc., whose common stock is currently selling for $12 per share, is expected

to pay a $1.80 dividend, and sell for $14.40 one year from now. What are the dividend yield, growth rate,

and total rate of return, respectively?

A) 15%; 20%; 35%

B) 10%; 5%; 15%

C) 15%; 12%; 27%

D) 20%; 15%; 35%

Keywords: Dividend Yield, Growth Rate, Total Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

11) LED Corp.’s common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at

a 12-percent annual rate forever. If LED’s current market price is $40.00, and your required rate of return

is 23 percent, should you purchase the stock?

A) No, the percentage return on the stock is too high, thus it is too risky.

B) Yes, the stock is expected to return more than you require.

C) No, the stock is overpriced.

D) Not enough information is given.

Keywords: Constant Growth Dividend Valuation Model, Required Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Reflective Thinking

12) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends. What is the

expected rate of return?

Keywords: Preferred Stock Valuation, Expected Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

13) You purchased one share of Sophia Enterprises common stock for $30 today. If the stock pays a

dividend of $6.50 in one year, and sells for $32.50 at that time, what will the dividend yield, growth rate,

and total rate of return be for the year?

Keywords: Dividend Yield, Growth Rate, Total Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

14) Tannerly Worldwide’s common stock is currently selling for $48 a share. If the expected dividend at

the end of the year is $2.40 and last year’s dividend was $2.00, what is the rate of return implicit in the

current stock price?

Keywords: Expected Rate of Return, Dividend Yield, Growth Rate

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

15) Miller’s preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.

a. What is the expected rate of return on the stock?

b. If an investor’s required rate of return is 9%, what is the value of the stock to that investor?

c. Considering the investor’s required rate of return, does this stock seem to be a desirable investment?

Keywords: Preferred Stock Valuation, Expected Rate of Return, Required Rate of Return

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking

16) The common stock of Cranberry Inc. is selling for $26.75 on the open market. Next year’s dividend is

expected to be $3.68, and the growth rate of this company is estimated to be 5.5%. If Richard Dean, an

average investor, is considering purchasing this stock at the market price, what is his expected rate of

return?

Keywords: Expected Rate of Return, Dividend Yield, Growth Rate

Learning Obj.: L.O. 8.5

AACSB: Analytical Thinking