Fundamentals of Corporate Finance 3e Test Bank
60. Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend
to grow at 7 percent for the next four years. What is the present value of dividends over the next
five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations.
Round final answer to two decimal places.)
A) $10.76
B) $9.80
C) $11.88
D) $11.50
61. Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25
in each of the following three years. If their required rate of return is 14 percent, what is the present
value of their dividends over the next four years? (Do not round intermediate calculations. Round
final answer to two decimal places)
A) $13.50
B) $9.72
C) $12.50
D) $11.63
Fundamentals of Corporate Finance 3e Test Bank
62. Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings
at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last
year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a
dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6.
What is the present value of the dividends to be paid out over the next six years if the required rate
of return is 15 percent?(Do not round intermediate calculations. Round final answer to two decimal
places.)
A) $13.24
B) $12.00
C) $6.57
D) $10.24
63. Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The
company’s expected dividend growth rates over the next four years are as follows: 25 percent, 30
percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth
rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of
Fundamentals of Corporate Finance 3e Test Bank
the dividends over the fast growth phase? (Do not round intermediate calculations. Round final
answer to two decimal places.)
A) $1.25
B) $6.46
C) $8.37
D) $7.23
64. Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay
dividends in the next two years either as it recovers from an economic slowdown. Three years from
now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the
present value of the dividends to be received over the next five years if the discount rate is 15
percent?( Do not round intermediate calculations. Round final answer to two decimal places.)
A) $4.85
B) $5.37
C) $5.50
D) $6.14
Fundamentals of Corporate Finance 3e Test Bank
65. Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for
the foreseeable future. The company’s last dividend was $3.25, and it is unlikely to change the
amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round
the final answer to two decimal places.)
A) $39.00
B) $3.69
C) $27.08
D) $21.23
66. Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and
it expects no change in future dividends. What is the current price of the company’s stock given a
discount rate of 9 percent?
A) $40.50
B) $50.00
C) $45.00
D) $500.00
Fundamentals of Corporate Finance 3e Test Bank
67. Metasteel Limited Co. has a stable sales track record, but does not expect to grow in the next
several years. Its last annual dividend was $5.75. If the required rate of return on similar
investments is 18 percent, what is the current stock price? (Round the answer to two decimal
places.)
A) $103.50
B) $13.50
C) $39.30
D) $31.94
68. Ambassador Corp. sells household cleaners producing a revenue stream that has remained
unchanged in the last few years. The firm does not expect any change in its sales or earnings in the
next several years. The stock is currently selling at $46.88. If the required rate of return is 16
percent, what is the dividend paid by this company? (Round the answer to two decimal places.)
A) $2.93
B) $4.65
C) $6.89
D) $7.50
69. A communications company pays annual dividends of $8.50 with no possibility of it changing in
the next several years. If the firm’s stock is currently selling at $60.71, what is the required rate of
return? (Round to nearest whole number.)
Fundamentals of Corporate Finance 3e Test Bank
A) 14%
B) 16%
C) 13%
D) 15%
70. You are interested in investing in a company that expects to grow steadily at an annual rate of 6
percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate
of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the
nearest dollar.)
A) $58
B) $61
C) $23
D) $24
71. Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate
of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the
current price of this stock? (Round to the nearest dollar.)
A) $74
B) $32
Fundamentals of Corporate Finance 3e Test Bank
C) $80
D) $60
72. Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a
constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected
dividend, a year from now? (Round the answer to two decimal places.)
A) $4.43
B) $3.25
C) $10.75
D) $6.33
73. Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company’s next dividend is
$2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not
round intermediate calculations. Round final answer to the nearest percent.)
A) 13%
B) 16%
C) 20%
Fundamentals of Corporate Finance 3e Test Bank
D) 21%
74. A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the
required rate of return is 15 percent, what is the price of the stock three years from now? (Do not
round intermediate calculations. Round final answer to two decimal places.)
A) $58.31
B) $46.29
C) $51.02
D) $42.83
Fundamentals of Corporate Finance 3e Test Bank
75.
Which of the following is the most typical example of a zero-growth dividend stock?
A)
The common stock of a firm in the biotechnology industry.
B)
The preferred stock of a utility company.
C)
The common stock of a firm in the health care industry.
D)
The common stock of a firm in the information technology industry.
Ans:
B
76.
The constant growth dividend model would be useful to determine the value of all, but which of
the following firms?
A)
A firm whose earnings and dividends are declining at a fairly steady rate.
B)
A firm whose sales, profits, and dividends are growing at an annual average compound
rate of 5 percent.
C)
A firm whose earnings and dividends are growing at a fairly steady rate.
D)
A firm whose expected sales, profits, and dividends are flat.
Ans:
D
77. Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40
percent for the next two years and then a growth rate of 20 percent for the following two years.
After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first
dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent,
what is the current price of the stock? (Do not round intermediate calculations. Round final answer
to two decimal places.)
A) $15.63
B) $4.70
C) $30.30
D) $22.68
Fundamentals of Corporate Finance 3e Test Bank
78. BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30
percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7
percent for the next several years. The company paid a dividend of $2.00 last week. If the required
rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate
calculations. Round final answer to two decimal places.)
A) $51.03
B) $36.86
C) $56.12
D) $46.37
Fundamentals of Corporate Finance 3e Test Bank
79. Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years.
It will then settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year
3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of
the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)
A) $85.94
B) $97.19
C) $50.59
D) $65.68
80. Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the
company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is
15 percent, what is the current market price of the stock? (Do not round intermediate calculations.
Round final answer to two decimal places.)
A) $69.41
B) $93.63
C) $57.54
D) $80.29
Fundamentals of Corporate Finance 3e Test Bank
81. Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of
35 percent for the next four years. After four years, the firm will grow at a constant rate of 6
percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is
20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final
answer to two decimal places.)
A) $14.64
B) $32.18
C) $36.43
D) $21.82
Fundamentals of Corporate Finance 3e Test Bank
82.
Suppose a firm’s expected dividends for the next three years are as follows: D1 = $1.10, D2 =
$1.20, and D3 = $1.30. After three years, the firm’s dividends are expected to grow at
5.00 percent per year. What should the current price of the firm’s stock (P0) be today if
investors require a rate of return of 12.00 percent on the stock? (Do not round
intermediate calculations. Round off final answer to the nearest $0.01)
A)
$61.30
B)
$10.10
C)
$16.74
D)
$24.12
Ans:
C
83.
Which of the following statements is true?
A)
In order for the constant growth dividend model to properly value a firm’s common
stock, R must be greater than g.
B)
From a practical perspective, the growth rate in the constant growth dividend model must
be greater than the sum of the long-term rate of inflation and the long-term real
growth rate of the economy.
C)
In order for the constant growth dividend model to properly value a firm’s common
stock, g must be greater than R.
D)
The constant growth dividend model can be used effectively to value the common shares
of a mixed growth stock.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
84. Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5
percent. If the required rate of return is 7.75 percent, what is the stock’s current market price?
(Round off to the two decimal places.)
A) $12.90
B) $70.97
C) $53.27
D) $62.14
AICPA: Measurement
85. The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The
bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred
stock given a required rate of return of 8.5 percent? (Round off to two decimal places.)
A) $23.06
B) $65.88
C) $37.57
D) $43.25
86. The preferred stock of Acme International is selling currently at $110.35. If your required rate of
return is 9.75 percent, what is the dividend paid by this stock? (Round off to the two decimal
places.)
A) $9.75
B) $11.32
C) $10.76
D) $8.53
Fundamentals of Corporate Finance 3e Test Bank
87. Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is
selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly
dividend paid by the firm? (Do not round intermediate calculations. Round final answer to two
decimal places.)
A) $8.76
B) $10.50
C) $2.19
D) $2.63
88. The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value.
The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred
stock given a required rate of return of 12.5 percent?
A) $47.25
B) $80.00
C) $20.80
Fundamentals of Corporate Finance 3e Test Bank
D) $83.20
89.
Which of the following statements about preferred stock is FALSE?
A)
Preferred stock has a higher-priority claim on the firm’s assets than the common stock.
B)
Failure to pay dividends on preferred stocks will result in a default.
C)
Preferred stock has a lower-priority claim on the firm’s assets than the firm’s creditors in
the event of default.
D)
Preferred stock typically pays a fixed dividend.
Ans:
B
90.
Durango Water Works has an outstanding issue of preferred stock that has a par (maturity
value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by
the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the
preferred stock’s yield–to-maturity? (Round off to the nearest 0.01%)
A)
6.72%
B)
5.64%
C)
4.28%
D)
7.73%
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
91. Discuss the significance of an active secondary market to both issuers of securities and to investors.
92. How do the secondary markets for securities differ across the four types of markets?
Fundamentals of Corporate Finance 3e Test Bank
93. Differentiate the characteristics of common and preferred stocks.