18/12/2019 20:21:12 Stock Valuation 1 page

CHAPTER 8
Stock Valuation
1. An asset characterized by cash flows that increase at a constant rate forever is called a:
a. growing perpetuity.
b. growing annuity.
c. common annuity.
d. perpetuity due.
e. preferred stock.

2. The stock valuation model that determines the current stock price by dividing the next annual
dividend amount by the excess of the discount rate less the dividend growth rate is called the _____
model.
a. zero growth
b. dividend growth
c. capital pricing
d. earnings capitalization
e. discounted dividend

3. Next year’s annual dividend divided by the current stock price is called the:
a. yield to maturity.
b. total yield.
c. dividend yield.
d. capital gains yield.
e. earnings yield.

4. The rate at which a stock’s price is expected to appreciate (or depreciate) is called the _____ yield.
a. current
b. total
c. dividend
d. capital gains
e. earnings

5. A form of equity which receives preferential treatment in the payment of dividends is called _____
stock.
a. dual class
b. cumulative
c. deferred
d. preferred
e. common

6. A _____ is a form of equity security that has a stated liquidating value.

a. bond
b. debenture
c. proxy
d. common stock
e. preferred stock

7. A form of equity which receives no preferential treatment in either the payment of dividends or in
bankruptcy distributions is called _____ stock.
a. dual class
b. cumulative
c. deferred
d. preferred
e. common
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8. The voting procedure whereby shareholders may cast all of their votes for one member of the board is
called _____ voting.
a. democratic
b. cumulative
c. straight
d. deferred
e. proxy

9. The voting procedure where you must own 50 percent plus one of the outstanding shares of stock to
guarantee that you will win a seat on the board of directors is called _____ voting.
a. democratic
b. cumulative
c. straight
d. deferred
e. proxy

10. The voting procedure where a shareholder grants authority to another individual to vote his/her shares
is called _____ voting.
a. democratic
b. cumulative
c. straight
d. deferred
e. proxy

11. Preemptive rights refer to the right of shareholders to:

a. share proportionately in dividends paid.
b. share proportionately in any new stock issues sold.
c. share proportionately in liquidated assets.
d. vote at annual shareholder meetings.
e. override the votes of other shareholders.

12. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in
kind, are called:
a. retained earnings.
b. net income.
c. dividends.
d. redistributions.
e. infused equity.

13. The market in which new securities are originally sold to investors is called the _____ market.
a. dealer
b. auction
c. over-the-counter
d. secondary
e. primary

14. The market in which previously issued securities are traded among investors is called the _____
market.
a. dealer
b. auction
c. over-the-counter
d. secondary
e. primary

15. An agent who buys and sells securities from inventory is called a:
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a. broker.
b. trader.
c. capitalist.
d. principal.
e. dealer.

16. An agent who arranges security transactions among investors is called a:

a. broker.
b. trader.
c. capitalist.
d. principal.
e. dealer.

17. The owner of a seat on the New York Stock Exchange is called a(n) _____ of the exchange.
a. friend
b. member
c. agent
d. trustee
e. dealer

18. A member of the New York Stock Exchange acting as a dealer in one or more securities on the
exchange floor is called a:
a. floor trader.
b. floor post.
c. specialist.
d. floor broker.
e. commission broker.

19. A member of the New York Stock Exchange who executes orders for commission brokers on a fee
basis is a:
a. floor trader.
b. dealer.
c. specialist.
d. floor broker.
e. floor agent.

20. A member of the New York Stock Exchange who executes buy and sell orders from customers once
transmitted to the exchange floor is called a:
a. floor trader.
b. dealer.
c. specialist.
d. floor broker.
e. commission broker.

21. A member of the New York Stock Exchange who trades for his or her own account, trying to
anticipate temporary price fluctuations, is called a(n):
a. floor trader.
b. exchange customer.
c. specialist.
d. floor broker.
e. commission broker.

22. The electronic system used by the New York Stock Exchange which enables orders to be transmitted
directly to a specialist is called the _____ system.
a. NASDAQ
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b. SuperDOT
c. Instinet
d. Internet
e. brokerage

23. The stream of customer buy and sell orders for securities is referred to as the:
a. paper trail.
b. trading volume.
c. order flow.
d. bid-ask spread.
e. commission trail.

24. A securities market primarily comprised of dealers who buy and sell for their own inventories is
generally referred to as a(n) ___ market.
a. auction
b. private
c. over-the-counter
d. regional
e. electronic network

25. The inside quotes for a security are the:

a. first posted bid and ask quotes of the trading day.
b. price quotes which apply only on the floor of the exchange.
c. highest bid quote and the lowest ask quote.
d. lowest bid quote and the highest ask quote.
e. averages of all the bid and ask quotes listed in the specialist’s order book.

26. The James River Co. pays an annual dividend of $1.50 per share on its common stock.
This dividend amount has been constant for the past 15 years and is expected to remain
constant. Given this, one share of James River Co. stock:
a. is basically worthless as it offers no growth potential.
b. has a market value equal to the present value of $1.50 paid one year from today.
c. is valued as if the dividend paid is a perpetuity.
d. is valued with an assumed growth rate of 3 percent.
e. has a market value of $15.00.

27. The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the market price of
Kenwith stock will:
a. also remain constant.
b. increase over time.
c. decrease over time.
d. increase when the market rate of return increases.
e. decrease when the market rate of return increases.

28. The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing that amount by 5
percent each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing
their dividend by 3 percent annually. Given this, it can be stated with certainty that the _____ of the
Koster Co. stock is greater than the _____ of the Keyser Co. stock.
a. market price; market price
b. dividend yield; dividend yield
c. rate of capital gain; rate of capital gain
d. total return; total return
e. capital gains; dividend yield

29. The dividend growth model:

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I. assumes that dividends increase at a constant rate forever.

II. can be used to compute a stock price at any point of time.
III. states that the market price of a stock is only affected by the amount of the dividend.
IV. considers capital gains but ignores the dividend yield.
a. I only
b. II only
c. III and IV only
d. I and II only
e. I, II, and III only

30. The underlying assumption of the dividend growth model is that a stock is worth:
a. the same amount to every investor regardless of their desired rate of return.
b. the present value of the future income which the stock generates.
c. an amount computed as the next annual dividend divided by the market rate of return.
d. the same amount as any other stock that pays the same current dividend and has the same required
rate of return.
e. an amount computed as the next annual dividend divided by the required rate of return.

31. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of
return to increase across the board on all equity securities, then you should also expect the:
a. market values of all stocks to increase, all else constant.
b. market values of all stocks to remain constant as the dividend growth will offset the
increase in the market rate.
c. market values of all stocks to decrease, all else constant.
d. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a
constant price.
e. dividend growth rates to increase to offset this change.

32. Latcher’s Inc. is a relatively new firm that is still in a period of rapid development. The
company plans on retaining all of its earnings for the next six years. Seven years from
now, the company projects paying an annual dividend of $.25 a share and then
increasing that amount by 3 percent annually thereafter. To value this stock as of today, you would
most likely determine the value of the stock _____ years from today before determining today’s
value.
a. 4
b. 5
c. 6
d. 7
e. 8

33. The Robert Phillips Co. currently pays no dividend. The company is anticipating
dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After
that, the company anticipates increasing the dividend by 4 percent annually. The first
step in computing the value of this stock today, is to compute the value of the stock in
year:
a. 3.
b. 4.
c. 5.
d. 6.
e. 7.

34. Supernormal growth refers to a firm that increases its dividend by:
a. three or more percent per year.
b. a rate which is most likely not sustainable over an extended period of time.
c. a constant rate of 2 or more percent per year.
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d. $.10 or more per year.

e. an amount in excess of $.10 a year.

35. The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
a. I and II only
b. I and IV only
c. II and III only
d. II and IV only
e. III and IV only

36. The total rate of return on a stock can be positive even when the price of the stock depreciates because
of the:
a. capital appreciation.
b. interest yield.
c. dividend yield.
d. supernormal growth.
e. real rate of return.

37. Fred Flintlock wants to earn a total of 10 percent on his investments. He recently purchased shares of
ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock
needs to _____ if Fred is to achieve his 10 percent rate of return.
a. remain constant
b. decrease by 5 percent
c. increase by 5 percent
d. increase by 10 percent
e. increase by 15 percent

38. Which one of the following correctly defines the dividend growth model?
a. P0 = D0  (R-g)
b. D = P0  (R-g)
c. R = (P0  D0) + g
d. R = (D1  P0) + g
e. P0 = (D1  R) + g

39. Shareholders generally have the right to:

I. elect the corporate directors.
II. select the senior management of the firm.
III. elect the chief executive officer (CEO).
IV. elect the chief operating officer (COO).
a. I only
b. I and III only
c. II only
d. I and II only
e. III and IV only

40. Jack owns 35 shares of stock in Beta, Inc. and wants to exercise as much control as possible over the
company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote.
Presently, the company is voting to elect two new directors. Which one of the following statements
must be true given this information?
a. If straight voting applies, Jack is assured one seat on the board.
b. If straight voting applies, Jack can control both open seats.
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c. If cumulative voting applies, Jack is assured one seat on the board.

d. If cumulative voting applies, Jack can control both open seats.
e. Regardless of the type of voting employed, Jack does not own enough shares to control any of the
seats.

41. ABC Co. is owned by a group of shareholders who all vote independently and who all want personal
control over the firm. If straight voting is utilized, a shareholder:
a. must either own enough shares to totally control the elections or else he/she has no control
whatsoever.
b. will be able to elect at least one director as long as there are at least three open positions and the
shareholder owns at least 25 percent plus one of the outstanding shares.
c. must own at least two-thirds of the shares, plus one, to exercise control over the elections.
d. is only permitted to elect one director, regardless of the number of shares owned.
e. who owns more shares than anyone else, regardless of the number of shares owned, will control the
elections.

42. The Zilo Corp. has 1,000 shareholders and is preparing to elect three new board members. You do not
own enough shares to control the elections but are determined to oust the current leadership. The most
likely result of this situation is a:
a. negotiated settlement where you are granted control over one of the three open positions.
b. legal battle for control of the firm based on your discontent as an individual shareholder.
c. arbitrated settlement whereby you are granted control over one of the three open positions.
d. total loss of power for you since you are a minority shareholder.
e. proxy fight for control of the firm.

43. Common stock shareholders are generally granted rights which include the right to:
I. share in company profits.
II. vote for company directors.
III. vote on proposed mergers.
IV. residual assets in a liquidation.
a. I and II only
b. II and III only
c. I and IV only
d. I, II, and IV only
e. I, II, III, and IV

44. The Scott Co. has a general dividend policy whereby they pay a constant annual dividend of $1 per
share of common stock. The firm has 1,000 shares of stock outstanding. The company:
a. must always show a current liability of $1,000 for dividends payable.
b. is obligated to continue paying $1 per share per year.
c. will be declared in default and can face bankruptcy if they do not pay $1 per year to each shareholder
on a timely basis.
d. has a liability which must be paid at a later date should the company miss paying an annual dividend
payment.
e. must still declare each dividend before it becomes an actual company liability.

45. The dividends paid by a corporation:

I. to an individual become taxable income of that individual.
II. reduce the taxable income of the corporation.
III. are declared by the chief financial officer of the corporation.
IV. to another corporation may or may not represent taxable income to the recipient.
a. I only
b. I and IV only
c. II and III only
d. I, II, and IV only
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e. I, III, and IV only

46. The owner of preferred stock:

a. is entitled to a distribution of income prior to the common shareholders.
b. has the right to veto the outcome of an election held by the common shareholders.
c. has the right to declare the company bankrupt whenever there are insufficient funds to
pay dividends to the common shareholders.
d. receives tax-free dividends if they are an individual and own more than 20 percent of
the outstanding preferred shares.
e. has the right to collect payment on any unpaid dividends as long as the stock is
noncumulative preferred.

47. A 6 percent preferred stock pays _____ a year in dividends per share.
a. $3
b. $6
c. $12
d. $30
e. $60

48. Which one of the following statements concerning preferred stock is correct?
a. Unpaid preferred dividends are a liability of the firm.
b. Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount
of the quarterly dividend.
c. Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
d. All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any
income can be distributed to common shareholders.
e. Preferred shareholders may be granted voting rights and seats on the board if preferred dividend
payments remain unpaid.

49. In a liquidation, each share of 5 percent preferred stock is generally entitled to a liquidation payment
of _____ as long as there are sufficient funds available.
a. $1
b. $5
c. $10
d. $50
e. $100

50. Quarterly income preferred securities distribute payments to investors which are:
I. taxed like interest income for tax purposes if the income recipient is an individual.
II. excluded from the taxable income of any individual recipient.
III. distributed from the after-tax income of the corporation.
IV. tax deductible to the corporation.
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
e. II only

51. Which one of the following transactions occurs in the primary market?
a. the sale of ABC stock by Fred Jones to Mary Smith
b. the tax-free gift of DEF stock to Heather by Jennifer
c. the repurchase of GHI stock from Tim by GHI
d. the initial sale of JKL stock by JKL to Jamie
e. the transfer of MNO stock from Tom to his son, Jon
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52. Which one of the following statements concerning dealers and brokers is correct?
a. A dealer in market securities arranges sales between buyers and sellers for a fee.
b. A dealer in market securities pays the asked price when purchasing securities.
c. A broker in market securities earns income in the form of a bid-ask spread.
d. A broker does not take ownership of the securities being traded.
e. A broker deals solely in the primary market.

53. Technically, the actual owners of the New York Stock Exchange are its:
a. members.
b. specialists.
c. dealers.
d. floor brokers.
e. commission brokers.

54. Which one of the following players on the floor of the New York Stock Exchange can
be likened to part-time help in that they are called to duty only when others are fully
employed?
a. floor trader
b. specialist
c. dealer
d. floor broker
e. commission broker

55. The post is a stationary position on the floor of the New York Stock Exchange where a _____ is
assigned to work.
a. floor trader
b. specialist
c. dealer
d. floor broker
e. commission broker

56. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of
1.42. Based on this information, which one of the following statements is correct?
a. The closing price on the previous day was $1.42 higher than today’s closing price.
b. A dealer will buy the stock at $22.87 and sell it at $26 a share.
c. The stock increased in value between yesterday’s close and today’s close by $.0142.
d. The earnings per share are equal to 1/26th of $22.87.
e. The earnings per share have increased by $1.42 this year.

57. A stock listing contains the following information: P/E 17.5, closing price 33.10,
dividend .80, YTD % chg 3.4, and a net chg of -.50. Which of the following statements
are correct given this information?
I. The stock price has increased by 3.4 percent during the current year.
II. The closing price on the previous trading day was $32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5 percent.
a. I and II only
b. I and III only
c. II and III only
d. III and IV only
e. I, III, and IV only

58. Michael’s, Inc. just paid $1.40 to their shareholders as the annual dividend. Simultaneously, the
company announced that future dividends will be increasing by 4.5 percent. If you require an 8
percent rate of return, how much are you willing to pay to purchase one share of Michael’s stock?
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a. $31.11
b. $32.51
c. $40.00
d. $41.80
e. $43.68

59. Angelina’s made two announcements concerning their common stock today. First, the
company announced that their next annual dividend has been set at $2.16 a share.
Secondly, the company announced that all future dividends will increase by 4 percent
annually. What is the maximum amount you should pay to purchase a share of
Angelina’s stock if your goal is to earn a 10 percent rate of return?
a. $21.60
b. $22.46
c. $27.44
d. $34.62
e. $36.00

60. How much are you willing to pay for one share of stock if the company just paid an
$.80 annual dividend, the dividends increase by 4 percent annually and you require an
8 percent rate of return?
a. $19.23
b. $20.00
c. $20.40
d. $20.80
e. $21.63

61. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are
expected to increase by 5 percent annually. What is one share of this stock worth to
you today if the appropriate discount rate is 14 percent?
a. $7.14
b. $7.50
c. $11.11
d. $11.67
e. $12.25

62. Majestic Homes stock traditionally provides an 8 percent rate of return. The company
just paid a $2 a year dividend which is expected to increase by 5 percent per year. If
you are planning on buying 1,000 shares of this stock next year, how much should you
expect to pay per share if the market rate of return for this type of security is 9 percent
at the time of your purchase?
a. $48.60
b. $52.50
c. $55.13
d. $57.89
e. $70.00

63. Leslie’s Unique Clothing Stores offers a common stock that pays an annual dividend
of $2.00 a share. The company has promised to maintain a constant dividend. How
much are you willing to pay for one share of this stock if you want to earn 12 percent
return on your equity investments?
a. $10.00
b. $13.33
c. $16.67
d. $18.88
e. $20.00
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64. Martin’s Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the
past three years, respectively. The company now predicts that it will maintain a
constant dividend since its business has leveled off and sales are expected to remain
relatively constant. Given the lack of future growth, you will only buy this stock if you
can earn at least a 15 percent rate of return. What is the maximum amount you are
willing to pay to buy one share of this stock today?
a. $10.00
b. $13.33
c. $16.67
d. $18.88
e. $20.00

65. The common stock of Eddie’s Engines, Inc. sells for $25.71 a share. The stock is
expected to pay $1.80 per share next month when the annual dividend is distributed.
Eddie’s has established a pattern of increasing their dividends by 4 percent annually
and expects to continue doing so. What is the market rate of return on this stock?
a. 7 percent
b. 9 percent
c. 11 percent
d. 13 percent
e. 15 percent

66. The current yield on Alpha’s common stock is 4.8 percent. The company just paid a
$2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend
growth rate is expected to remain constant at the current level. What is the required
rate of return on Alpha’s stock?
a. 10.04 percent
b. 16.07 percent
c. 21.88 percent
d. 43.75 percent
e. 45.94 percent

67. Martha’s Vineyard recently paid a $3.60 annual dividend on their common stock. This
dividend increases at an average rate of 3.5 percent per year. The stock is currently
selling for $62.10 a share. What is the market rate of return?
a. 2.5 percent
b. 3.5 percent
c. 5.5 percent
d. 6.0 percent
e. 9.5 percent

68. Bet’R Bilt Bikes just announced that their annual dividend for this coming year will be
$2.42 a share and that all future dividends are expected to increase by 2.5 percent
annually. What is the market rate of return if this stock is currently selling for $22 a
share?
a. 9.5 percent
b. 11.0 percent
c. 12.5 percent
d. 13.5 percent
e. 15.0 percent

69. Shares of common stock of the Samson Co. offer an expected total return of 12 percent. The dividend
is increasing at a constant 8 percent per year. The dividend yield must be:
a. - 4 percent.
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b. 4 percent.
c. 8 percent.
d. 12 percent.
e. 20 percent.

70. The common stock of Grady Co. returned an 11.25 percent rate of return last year.The dividend amount
was $.70 a share which equated to a dividend yield of 1.5 percent. What was the rate of price appreciation on the
stock?
a. 1.50 percent
b. 8.00 percent
c. 9.75 percent
d. 11.25 percent
e. 12.75 percent

71. Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5
percent annually. The market rate of return on this stock is 9 percent. What is the amount of the last
dividend paid by Weisbro and Sons?
a. $.77
b. $.80
c. $.84
d. $.87
e. $.88

72. The common stock of Energizer’s pays an annual dividend that is expected to increase
by 10 percent annually. The stock commands a market rate of return of 12 percent and
sells for $60.50 a share. What is the expected amount of the next dividend to be paid
on Energizer’s common stock?
a. $.90
b. $1.00
c. $1.10
d. $1.21
e. $1.33

73. The Reading Co. has adopted a policy of increasing the annual dividend on their common stock at a
constant rate of 3 percent annually. The last dividend they paid was $0.90 a share. What will their
dividend be in six years?
a. $.90
b. $.93
c. $1.04
d. $1.07
e. $1.11

74. A stock pays a constant annual dividend and sells for $31.11 a share. If the rate of
return on this stock is 9 percent, what is the dividend amount?
a. $1.40
b. $1.80
c. $2.20
d. $2.40
e. $2.80

75. You have decided that you would like to own some shares of GH Corp. but need an
expected 12 percent rate of return to compensate for the perceived risk of such ownership. What is the
maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50
annual dividend per share?
a. $26.04
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b. $29.17
c. $32.67
d. $34.29
e. $36.59

76. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of
9.5 percent. The company just paid their annual dividend of $1.20. What is the rate of
growth of their dividend?
a. 5.2 percent
b. 5.5 percent
c. 5.9 percent
d. 6.0 percent
e. 6.3 percent

77. B&K Enterprises will pay an annual dividend of $2.08 a share on their common stock
next week. Last year, the company paid a dividend of $2.00 a share. The company
adheres to a constant rate of growth dividend policy. What will one share of B&K
common stock be worth ten years from now if the applicable discount rate is 8
percent?
a. $71.16
b. $74.01
c. $76.97
d. $80.05
e. $83.25

78. Wilbert’s Clothing Stores just paid a $1.20 annual dividend. The company has a policy
whereby the dividend increases by 2.5 percent annually. You would like to purchase
100 shares of stock in this firm but realize that you will not have the funds to do so for
another three years. If you desire a 10 percent rate of return, how much should you
expect to pay for 100 shares when you can afford to buy this stock? Ignore trading
costs.
a. $1,640
b. $1,681
c. $1,723
d. $1,766
e. $1,810

79. The Merriweather Co. just announced that they are increasing their annual dividend to
$1.60 and establishing a policy whereby the dividend will increase by 3.5 percent
annually thereafter. How much will one share of this stock be worth five years from
now if the required rate of return is 12 percent?
a. $21.60
b. $22.36
c. $23.14
d. $23.95
e. $24.79

80. Shares of the Katydid Co. common stock are currently selling for $27.73. The last
dividend paid was $1.60 per share. The market rate of return is 10 percent. At what
rate is the dividend growing?
a. 2.50 percent
b. 4.00 percent
c. 5.98 percent
d. 13.05 percent
e. 14.91 percent
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81. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20 percent a year for the next four years
and then decreasing the growth rate to 5 percent per year. The company just paid its
annual dividend in the amount of $1.00 per share. What is the current value of one
share of this stock if the required rate of return is 9.25 percent?
a. $35.63
b. $38.19
c. $41.05
d. $43.19
e. $45.81

82. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The
company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next
four years, respectively. After that the dividend will be a constant $2.50 per share per
year. What is the market price of this stock if the market rate of return is 15 percent?
a. $17.04
b. $22.39
c. $26.57
d. $29.08
e. $33.71

83. Can’t Hold Me Back, Inc. is preparing to pay their first dividends. They are
going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the
company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock
worth to you per share if you demand a 7 percent rate of return?
a. $7.20
b. $14.48
c. $18.88
d. $21.78
e. $25.06

84. NU YU announced today that they will begin paying annual dividends. The first
dividend will be paid next year in the amount of $.25 a share. The following dividends
will be $.40, $.60, and $.75 a share annually for the following three years, respectively.
After that, dividends are projected to increase by 3.5 percent per year. How much are
you willing to pay to buy one share of this stock if your desired rate of return is 12
percent?
a. $1.45
b. $5.80
c. $7.25
d. $9.06
e. $10.58

85. Now or Later, Inc. recently paid $1.10 as an annual dividend. Future dividends are
projected at $1.14, $1.18, $1.22, and $1.25 over the next four years, respectively.
Beginning five years from now, the dividend is expected to increase by 2 percent
annually. What is one share of this stock worth to you if you require an 8 percent rate
of return on similar investments?
a. $15.62
b. $19.57
c. $21.21
d. $23.33
e. $25.98
18/12/2019 20:21:11 Stock Valuation 15 page

86. The Red Bud Co. pays a constant dividend of $1.20 a share. The company announced
today that they will continue to do this for another 3 years after which time they will
discontinue paying dividends permanently. What is one share of this stock worth today
if the required rate of return is 7 percent?
a. $2.94
b. $3.15
c. $3.23
d. $3.44
e. $3.60

87. Bill Bailey and Sons pays no dividend at the present time. The company plans to start
paying an annual dividend in the amount of $.30 a share for two years commencing
two years from today. After that time, the company plans on paying a constant $1 a
share dividend indefinitely. How much are you willing to pay to buy a share of this
stock if your required return is 14 percent?
a. $4.82
b. $5.25
c. $5.39
d. $5.46
e. $5.58

88. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual
dividend last year. The company has announced plans to lower the dividend by $.50 a
year. Once the dividend amount becomes zero, the company will cease all dividends
permanently. You place a required rate of return of 16 percent on this particular stock
given the company’s situation. What is one share of this stock worth to you today?
a. $3.76
b. $4.08
c. $4.87
d. $5.13
e. $5.39

89. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road
to great success. The company paid their first annual dividend yesterday in the amount
of $.28 a share. The company plans to double each annual dividend payment for the
next three years. After that time, they are planning on paying a constant $1.50 per
share indefinitely. What is one share of this stock worth today if the market rate of
return on similar securities is 11.5 percent?
a. $9.41
b. $11.40
c. $11.46
d. $11.93
e. $12.43

90. BC ‘n D just paid their annual dividend of $.60 a share. The projected dividends for
the next five years are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time,
the dividends will be held constant at $1.40. What is this stock worth today at a 6
percent discount rate?
a. $20.48
b. $20.60
c. $21.02
d. $21.28
e. $21.43

91. Beaksley, Inc. is a very cyclical type of business which is reflected in their dividend
18/12/2019 20:21:11 Stock Valuation 16 page

policy. The firm pays a $2.00 a share dividend every other year. The last dividend was
paid last year. Five years from now, the company is repurchasing all of the outstanding
shares at a price of $50 a share. At an 8 percent rate of return, what is this stock worth
today?
a. $34.03
b. $37.21
c. $43.78
d. $48.09
e. $53.18

92. Last week, Railway Cabooses paid their annual dividend of $1.20 per share. The
company has been reducing the dividends by 10 percent each year. How much are you
willing to pay to purchase stock in this company if your required rate of return is 14
percent?
a. $4.50
b. $7.71
c. $10.80
d. $15.60
e. $27.00

93. Nu-Tek, Inc. is expecting a period of intense growth so have decided to retain more of
their earnings to help finance that growth. As a result they are going to reduce their
annual dividend by 10 percent a year for the next three years. After that they will
maintain a constant dividend of $.70 a share. Last year, the company paid $1.80 per
share. What is the market value of this stock if the required rate of return is 13
percent?
a. $6.79
b. $7.22
c. $8.22
d. $8.87
e. $9.01

94. The Double Dip Co. is expecting their ice cream sales to decline due to the increased
interest in healthy eating. Thus, the company has announced that they will be reducing
their annual dividend by 5 percent a year for the next two years. After that, they will
maintain a constant dividend of $1 a share. Last year, the company paid $1.40 per
share. What is this stock worth to you if you require a 9 percent rate of return?
a. $10.86
b. $11.11
c. $11.64
d. $12.98
e. $14.23

95. Butterup’s ‘N More wants to offer some preferred stock that pays an annual dividend of $2.00 a
share. The company has determined that stocks with similar characteristics
provide a 9 percent rate of return. What price should Butterup’s expect to receive per
share for this stock offering?
a. $18.35
b. $20.00
c. $21.80
d. $22.22
e. $24.22

96. The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and
sells for $20.24 a share. What is the rate of return on this security?
18/12/2019 20:21:11 Stock Valuation 17 page

a. 5.95 percent
b. 7.08 percent
c. 8.40 percent
d. 11.90 percent
e. 14.17 percent

97. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a
constant 6.58 percent rate of return. The stock is currently priced at $45.60 a share.
What is the amount of the dividend per share?
a. $3.00
b. $3.15
c. $3.50
d. $3.54
e. $3.62

98. You want to earn a 12 percent rate of return. Panco, Inc. preferred stock pays a $4.50
annual dividend. What is the maximum price you are willing to pay for one share of this stock?
a. $32.50
b. $37.50 (
c. $39.00
d. $40.50
e. $45.00