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Chapter 8 Stock Valuation 1. If one uses the perpetuity model to value stock, one assumes that P0 = P1 = . . . = P¥, implying that the annual return from owning the stock is zero. Ans: False

Level: Basic

Subject: Stock Valuation

Type: Concepts

2. If one uses the constant growth model to value stock, one assumes that P1 = P0 ´ (1 + g), P2 = P0 ´ (1 + g), etc. Ans: False

Level: Basic

Subject: Stock Valuation

Type: Concepts

3. According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate. Ans: True

Level: Basic

Subject: Stock Valuation

Type: Concepts

4. If a firm experiences a financial loss for the year, the loss is shared equally by the debtholders and equityholders. Ans: False

Level: Basic

Subject: Returns to Security Holders

Type: Concepts

5. A dividend on common stock, whether declared or not, is not a legal liability of the firm. Ans: False

Level: Basic

Subject: Dividends

Type: Concepts

6. For income tax purposes, preferred stock is more like debt than it is like common stock. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

7. Most preferred stocks have dividends that are cumulative. Ans: True

Level: Basic

Subject: Preferred Stock

Type: Concepts

8. Dividends on preferred stock are deductible from taxable income of the issuing firm. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

9. A firm must make its dividend payments to preferred shareholders before it makes any interest payments to its bondholders. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

10. The partial excludability of dividend income from taxable income makes preferred stock less desirable to purchasers than it might otherwise be. Ans: False

Level: Basic

Subject: Dividends

Type: Concepts

11. The price-earnings ratios for TSX stocks which are listed in The National Post are based on earnings per share for the past year. Ans: True

Level: Basic

Subject: Stock Quotation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 1

Chapter 8 Stock Valuation

12. 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. Ans: A

Level: Basic

Subject: Growing Perpetuity

Type: Definitions

13. The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the: A) Zero growth model. B) Dividend growth model. C) Capital Asset Pricing Model. D) Earnings capitalization model. E) Perpetual growth model. Ans: B

Level: Basic

Subject: Dividend Growth Model

Type: Definitions

14. A stock's next expected dividend divided by the current stock price is the: A) Current yield. B) Total yield. C) Dividend yield. D) Capital gains yield. E) Earnings yield. Ans: C

Level: Basic

Subject: Dividend Yield

Type: Definitions

15. The rate at which the stock price is expected to appreciate (or depreciate) is the: A) Current yield. B) Total yield. C) Dividend yield. D) Capital gains yield. E) Earnings yield. Ans: D

Level: Basic

Subject: Capital Gains Yield

Type: Definitions

16. Equity without priority for dividends or in the event of bankruptcy is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: E

Level: Basic

Subject: Common Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 2

Chapter 8 Stock Valuation

17. The term __________ is usually applied to stock that has no special preference either in paying dividends or in bankruptcy. A) preferred stock B) debenture C) common stock D) cumulative voting E) proxy Ans: C

Level: Basic

Subject: Common Stock

Type: Definitions

18. Preemptive rights refers to: A) The right of shareholders to share proportionately in dividends paid. B) The right of shareholders to share proportionately in any new stock issues sold. C) The right of shareholders to share proportionately in liquidated assets. D) The right of shareholders to vote at annual shareholder meetings. E) None of the above. Ans: B

Level: Basic

Subject: Preemptive Rights

Type: Definitions

19. 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. Ans: C

Level: Basic

Subject: Dividends

Type: Definitions

20. Equity with differential voting rights and/or dividend payment claims is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: A

Level: Basic

Subject: Dual Class Stock

Type: Definitions

21. Equity with priority for dividends and in the event of bankruptcy is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: D

Level: Basic

Subject: Preferred Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 3

Chapter 8 Stock Valuation

22. The short alphabetic abbreviation for an exchange-listed stock by which the issue is identified in the market is called the stock's _____________. A) open name B) trading range C) exchange name D) ticker symbol E) price/earnings description Ans: D

Level: Basic

Subject: Ticker Symbol

Type: Definitions

23. The voting procedure where shareholders may cast all of their votes for one member of the board is: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: B

Level: Basic

Subject: Cumulative Voting

Type: Definitions

24. The voting procedure where shareholders may cast all of their votes for each member of the board is: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: C

Level: Basic

Subject: Straight Voting

Type: Definitions

25. The voting procedure where shareholders grant authority to another individual to vote their shares is called: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: E

Level: Basic

Subject: Proxy Voting

Type: Definitions

26. A stock whose price can be computed by dividing the annual dividend amount by the required rate of return is called a _______growth stock. A) Constant B) Supernormal C) Zero D) Capital gains E) Dividend Ans: C

Level: Basic

Subject: Zero Growth Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 4

Chapter 8 Stock Valuation

27. Preferred stock is a type of _______ growth stock. A) Constant B) Zero C) Supernormal D) Capital gains E) Dividend Ans: B

Level: Basic

Subject: Preferred Stock

Type: Definitions

28. Given a price at year 5, the dividend in the dividend growth model would be defined as: A) The last annual dividend paid. B) The annual dividend in year 1. C) The quarterly dividend in year 5. D) The quarterly dividend in year 6. E) The annual dividend in year 6. Ans: E

Level: Basic

Subject: Dividend Time Period

Type: Definitions

29. The capital gains yield as used in the dividend growth model is defined as: A) D0 / P0. B) D1 / P0. C) g / r. D) g. E) g / P0. Ans: D

Level: Basic

Subject: Capital Gains Yield

Type: Definitions

30. The procedure which has the effect of permitting minority participation in voting is called ____ voting. A) Proxy B) Cumulative C) Straight D) Preferred E) Freeze out Ans: B

Level: Basic

Subject: Cumulative Voting

Type: Definitions

31. A cumulative dividend is defined as a dividend that is: A) Carried forward as an arrearage if not paid. B) Payable only if current operations generate sufficient cash in a year to pay the dividend. C) Paid only to senior holders of common stock. D) Treated as an interest expense. E) Paid as an extra payment if the share of stock is called. Ans: A

Level: Basic

Subject: Cumulative Dividends

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 5

Chapter 8 Stock Valuation

32. Which of the following is true of non-voting common stock? A) It is not legal in Canada to issue common stock without voting rights. B) A "coattail" provision requires that 2/3 of all common stock carry voting rights. C) Non-voting common stockholders must be paid a dividend each year. D) Non-voting shares must receive dividends no lower than dividends on voting shares. E) Non-voting shares commonly sell at a premium over voting shares. Ans: D

Level: Basic

Subject: Non-voting Common Stock

Type: Definitions

33. The required return is defined as: A) The capital gains yield plus the dividend yield. B) Next year's dividend divided by the current price. C) The increase in the value of a share of stock over a period of time. D) The rate at which a stock increases in value. E) The payment by a corporation to shareholders in the form of cash or stock. Ans: A

Level: Basic

Subject: Required Return

Type: Definitions

34. A grant of authority by a shareholder allowing for another individual to vote his/her shares is a _____________. A) preferred stock B) proxy C) specialist D) cumulative voting right E) dual class stock Ans: B

Level: Basic

Subject: Proxy Voting

Type: Concepts

35. Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds? I. Future cash flows on stocks are not known in advance. II. Common stocks don't have a maturity date. III. Common stock valuation is sensitive to estimates of the dividend growth rate. A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans: E

Level: Basic

Subject: Stock & Bond Valuation

Type: Concepts

36. Which of the following is true about the differences between debt and common stock? A) Debt is ownership in a firm but equity is not. B) Creditors have voting power while stockholders do not. C) Periodic payments made to either class of security are tax deductible for the issuer. D) Interest payments are promised while dividend payments are not. E) Bondholders can also own equity, but not vice versa. Ans: D

Level: Basic

Subject: Debt vs. Equity

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 6

Chapter 8 Stock Valuation

37. You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the ___________ model. A) zero growth B) supernormal growth C) nonconstant growth D) growing perpetuity E) bond pricing Ans: A

Level: Basic

Subject: Common Stock Valuation

Type: Concepts

38. Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30, respectively. This pattern is expected to continue into the future. This is an example of a company paying a: A) Dividend that grows by 10% each year. B) Dividend that grows at a constant rate. C) Dividend that grows by a decreasing amount. D) Dividend that grows at a decreasing rate. E) Preferred stock dividend. Ans: D

Level: Basic

Subject: Dividend Growth

Type: Concepts

39. Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can calculate ____________. I. the price today II. the price five years from now III. the dividend that is expected to be paid 10 years from now A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

40. Which of the following is (are) true? I. The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stock's required return. II. A decrease in the dividend growth rate will increase a stock's market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. A) I only B) III only C) II and III only D) I and III only E) I, II, and III Ans: B

Level: Basic

Subject: Stock Valuation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 7

Chapter 8 Stock Valuation

41. You are attempting to value a stock in an industry where firms are generating exceptional dividend growth, but this growth is expected to slow to an equilibrium growth rate in about five years. Of the stock valuation models studied, the most appropriate is the _______________. A) perpetuity model B) constant growth model C) supernormal growth model D) perpetual growth model E) preferred stock model Ans: C

Level: Basic

Subject: Stock Valuation

Type: Concepts

42. As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ________________. A) capital gains yield and a dividend growth rate B) capital gains growth rate and a dividend growth rate C) dividend payout ratio and a required rate of return D) dividend yield and the present dividend E) dividend yield and a capital gains yield Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

43. Which of the following is (are) true? I. The dividend yield on a stock is the annual dividend divided by the par value. II. When the constant dividend growth model holds, g = capital gains yield. III. The total return on a share of stock = dividend yield + capital gains yield. A) I only B) II only C) I and II only D) II and III only E) I, II, and III Ans: D

Level: Basic

Subject: Stock Yields

Type: Concepts

44. Given no change in required returns, the price of a stock whose dividend is constant will: A) Increase over time at a rate of r%. B) Decrease over time at a rate of r%. C) Increase over time at a rate equal to the dividend growth rate. D) Decrease over time at a rate equal to the dividend growth rate. E) Remain unchanged. Ans: E

Level: Basic

Subject: Stock Valuation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 8

Chapter 8 Stock Valuation

45. Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is I. D5/(r - g) II. P0 ´ (1 + g)4 III. D0 ´ (1 + g)/(r - g) A) I only B) II only C) I and II only D) I and III only E) I, II, and III Ans: C

Level: Basic

Subject: Stock Valuation

Type: Concepts

46. You are attempting to value the shares of a new, high-technology firm in a developing industry. You would MOST likely A) use the growth dividend model B) use the non-constant growth dividend model C) use the zero growth dividend model D) find the value by valuing the stock as a perpetuity E) not be able to value this company Ans: B

Level: Basic

Subject: Stock Valuation

Type: Concepts

47. Which of the following common shareholder rights kicks in when a merger is proposed? A) The right to share proportionately in dividends paid. B) The right to share proportionately in remaining assets from a liquidation. C) The right to vote for directors. D) Preference over preferred shareholders in the payment of dividends. E) The right to vote on shareholder matters of great importance. Ans: E

Level: Basic

Subject: Common Shareholder Rights

Type: Concepts

48. Which of the following is NOT usually a right of a common stockholder? A) Right of first refusal to buy new preferred stock, when issued B) Preemptive right C) Right to receive proportionate dividends, when paid D) Right to claim proportionate remaining assets from a liquidation E) Right to vote by proxy Ans: A

Level: Basic

Subject: Common Stock Rights

Type: Concepts

49. You just voted against a merger proposal made by another corporation. You must own: A) Preferred stock. B) Debentures. C) Common stock. D) Cumulative dividend stock. E) Class B stock. Ans: C

Level: Basic

Subject: Common Shareholder Rights

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 9

Chapter 8 Stock Valuation

50. As a common shareholder in a firm, which of the following allows you to share proportionately in any new stock sold? A) Proxy voting B) Preemptive right C) Cumulative voting D) Straight voting E) Dual class stock Ans: B

Level: Basic

Subject: Preemptive Rights

Type: Concepts

51. Which of the following is/are true about common stock dividends? I. Payment of dividends is a tax deductible business expense for a corporation. II. Dividends that have been declared but are not yet paid are liabilities of the corporation. III. Dividends received by both individuals and corporations are fully taxable. A) II only B) III only C) I and III only D) II and III only E) I, II, and III Ans: A

Level: Basic

Subject: Dividends

Type: Concepts

52. Which of the following statements about dividends is false? A) Preferred stock dividends often represent a tax-advantaged investment for some corporations. B) Dividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by shareholders. C) The payment of dividends is at the discretion of the board of directors. D) The payment of dividends by the corporation is not a tax-deductible business expense. E) A corporation can be sued for not paying undeclared dividends. Ans: E

Level: Basic

Subject: Dividends

Type: Concepts

53. The primary reason for creating dual or multiple classes of stock has to do with: A) Exchange listing requirements. B) Satisfying TSX bylaws. C) Freezing out minority shareholders. D) Paying for acquisitions. E) Control of the firm. Ans: E

Level: Basic

Subject: Classes Of Stock

Type: Concepts

54. Often, a firm creates a second class of stock that has ___________ as compared with the first class. A) a lower priority in liquidation B) the right to cumulative dividends C) unequal voting rights D) a preemptive E) cumulative voting power Ans: C

Level: Basic

Subject: Classes Of Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 10

Chapter 8 Stock Valuation

55. Which of the following is NEVER a right of an owner of a share of preferred stock? I. The right to share proportionately in preferred dividends paid. II. The right to share proportionately in remaining assets from a liquidation. III. The right to vote for directors. A) I only B) III only C) I and II only D) II and III only E) I and III only Ans: B

Level: Basic

Subject: Preferred Shareholder Rights

Type: Concepts

56. Which of the following does NOT correctly complete this sentence: Preferred stock is much like debt in that ______________. A) both frequently carry credit ratings B) both can be repaid using a sinking fund C) both receive a stated payment from the corporation during the year D) both payments are subject to the same tax treatment for the issuing firm E) the holders of both get a stated payment in the event of a liquidation Ans: D

Level: Basic

Subject: Preferred Stock

Type: Concepts

57. Which of the following is a true statement regarding publicly traded stocks and bonds? A) A share of preferred stock is generally easier to value than a share of common stock. B) The price of a stock is greater than the present value of all future dividends. C) Stock dividends are a legally-binding liability of the corporation. D) A share of preferred stock represents an ownership interest in a corporation. E) Preferred stock is more like common stock than it is like a bond. Ans: A

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

58. Which of the following typically applies to preferred stock but NOT to common stock? A) Par value B) Dividend yield C) Cumulative dividends D) It is legally considered equity E) The dividends are a tax-deductible expense Ans: C

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

59. Which of the following terms is typically associated with BOTH preferred stock and common stock? A) Proxy B) Voting rights C) Dividend yield D) Arrearage E) Cumulative voting Ans: C

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 11

Chapter 8 Stock Valuation

60. Which of the following is NOT a right of an owner of a share of common stock? A) The right to share proportionately in dividends paid. B) The right to share proportionately in remaining assets from a liquidation. C) The right to vote for directors. D) Preference over preferred shareholders in the payment of dividends. E) The right to vote on stockholder matters of great importance. Ans: D

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

61. Which of the following would be considered a violation of the rights of one or more classes of a firm's stakeholders? A) Common dividends are paid even though preferred dividends are in arrears. B) Preferred stockholders are paid before common shareholders in a liquidation. C) Common stockholders are able to place members on the board of directors to represent their interests in opposition to the board candidates backed by preferred shareholders. D) Common shareholders are able to vote by proxy even when they are unable to attend a shareholders' meeting in person. E) Debt is repaid before preferred shareholders are paid anything in a liquidation. Ans: A

Level: Basic

Subject: Priority Of Payments

Type: Concepts

62. Which of the following items does NOT usually appear in a National Post common stock quote? A) capital gains rate B) dividend yield C) closing price D) high and low price for the trading day E) number of shares traded (volume) Ans: A

Level: Basic

Subject: Stock Market Reporting

Type: Concepts

63. If two stocks have the same earnings per share and required rate of return, differences in the ____________ of the two companies can account for different stock prices. A) voting rights B) growth opportunities C) number of shares outstanding D) number of directors E) value of preferred stock Ans: B

Level: Basic

Subject: Growth Opportunities

Type: Concepts

64. ____________ can freeze out minority shareholders. A) Straight voting B) Cumulative dividends C) Proxy voting D) Cumulative voting E) Multiple classes of stock Ans: A

Level: Basic

Subject: Straight Voting

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 12

Chapter 8 Stock Valuation

65. You wish to be on the board of directors of a company. If you wish to buy as low a percentage of the total outstanding shares as is necessary to guarantee yourself a seat on the board, you should look for a firm that has ____________. A) cumulative preferred stock B) cumulative voting Class B stock C) convertible debentures D) straight voting common stock E) cumulative voting common stock Ans: E

Level: Basic

Subject: Cumulative Voting

Type: Concepts

66. It is more difficult to value a stock than it is to value a bond because: A) The future cash flows of a stock are known. B) The life of an equity security is limited. C) The required market rate of return on a stock is known in advance. D) Equity securities have no maturity date. E) The maturity value of a stock is known. Ans: D

Level: Intermediate

Subject: Common Stock Valuation

Type: Concepts

67. The ABC Co. has paid annual dividends of $0.30, $0.64, $1.20, and $1.45 over the past four years. Dividends in the future are expected to grow at a constant rate of 3.5%. Which one of the following formulas should be used to compute the value of the stock today? A) P0 = D1 / (1+r)1 + D2 / (1+r)2 ... + Dn / (1+r)n + Pn / (1+r)n B) P0 = D / r C) P0 = D1 / (1+r)n + g D) P0 = D1 / (r - g) E) P0 = D1 / (r - g) n Ans: D

Level: Intermediate

Subject: Dividend Growth Model

Type: Concepts

68. A supernormal growth stock generally: A) Is associated with a company that is experiencing rapid contraction. B) Tends to increase its dividends per share by 30% or more for an extended number of years. C) Has high growth dividends only for a limited number of years. D) Has dividends that grow at a high rate for the life of the stock. E) Is valued using the preferred stock valuation technique. Ans: C

Level: Intermediate

Subject: Supernormal Growth

Type: Concepts

69. D1 in the dividend growth model is associated with which of the following words when solving for P 0? A) Next, expected, future B) Last, just paid, recent C) Just paid, expected, past D) Paid today, recent, current E) Expected, paid today, recent Ans: A

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 13

Chapter 8 Stock Valuation

70. If the required rate of return used in the dividend growth model is increased, then: A) The dividend amount must also increase. B) The current value of the stock will decrease. C) P0 will increase. D) The supernormal model must be used to value the stock. E) The growth rate must also increase. Ans: B

Level: Intermediate

Subject: Dividend Growth Model

Type: Concepts

71. Which of the following rights are granted to shareholders of common stock? I. Election of corporate directors II. Selection of all senior management executives III. The option of voting by proxy IV. The right to share in any remaining assets in a liquidation A) I and III only B) II and IV only C) I, II, and III only D) I, III, and IV only E) I, II, III, and IV Ans: D

Level: Intermediate

Subject: Shareholder Rights

Type: Concepts

72. Which of the following statements concerning dividends is (are) correct? I. Dividends become a liability of the corporation at the time they are declared. II. The stockholders determine the amount of dividend to be paid. III. Dividends are a tax deductible expense. IV. Common stock dividends can be either cumulative or non-cumulative. A) I only B) II only. C) I and IV only D) II and IV only E) I and III only Ans: A

Level: Intermediate

Subject: Dividends

Type: Concepts

73. If the management of a corporation wants to raise equity capital while maintaining control over the corporation and limiting their cash outflows, they should issue shares of: A) Non-voting preferred stock. B) Voting preferred stock. C) Voting common stock. D) Non-voting common stock. E) Zero coupon bonds. Ans: D

Level: Intermediate

Subject: Classes Of Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 14

Chapter 8 Stock Valuation

74. Shareholders of convertible preferred stock generally have the: A) Right to convert their shares into bonds with an equivalent yield-to-maturity. B) Obligation to convert their shares into callable shares of common stock. C) Obligation to convert their shares into shares of common stock. D) Right to convert their shares into cash at par value at their discretion. E) Right to convert their shares into shares of common stock. Ans: E

Level: Intermediate

Subject: Convertible Preferred

Type: Concepts

75. Which one of the following statements is correct concerning the differences between preferred and common stock? A) Common shareholders have first right of priority after creditors in liquidation. B) Preferred shares carry voting rights while common shares do not. C) Common shareholders generally have more control over a corporation than preferred shareholders. D) Common dividends in arrearage must be paid prior to any additional preferred stock dividends. E) Common stock is a form of equity while preferred stock is a form of debt from a legal standpoint. Ans: C

Level: Intermediate

Subject: Preferred Versus Common Stock

Type: Concepts

76. It is easier for an outsider to gain control over a corporation when: A) Voting by proxy is not permitted. B) Management controls most of the common shares outstanding. C) Cumulative voting is used. D) Preferred shares are not convertible. E) Shareholders receive a consistently high rate of return. Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Concepts

77. There are three seats open on the board of directors of ABC, Inc. Ann owns voting shares of ABC common stock. If ABC uses cumulative voting, the maximum number of shares that Ann can vote for any one position is equal to: A) The number of open seats. B) One-third of the number of shares owned. C) The number of shares owned. D) Three times the number of shares owned multiplied by the number of open seats. E) The number of seats open times the number of shares owned. Ans: E

Level: Basic

Subject: Cumulative Voting

Type: Concepts

78. The dividend growth model assumes that: A) The rate of growth is constant. B) Next year's dividend is the same amount as last year's dividend. C) The rate of growth exceeds the required rate of return. D) The dividend amount used in the formula is the last dividend paid. E) The valuation is as of the year following the payment of the dividend used in the computation. Ans: A

Level: Intermediate

Subject: Dividend Growth Model

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Concepts

Page 15

Chapter 8 Stock Valuation

79. Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Which of the following types of shareholders will benefit from the increased profits that will be generated from this find? I. Preferred shareholders II. Convertible preferred shareholders III. Non-voting common shareholders IV. Common shareholders A) IV only B) II and IV only C) I and II only D) I, II, and IV only E) II, III, and IV only Ans: E

Level: Intermediate

Subject: Common Stock

Type: Concepts

80. The capital gain yield: A) When subtracted from the dividend yield is equal to the required rate of return. B) Is the rate at which the price of the stock grows. C) Must always be a positive value. D) Is equal to the dividend amount divided by the current market price of the stock. E) Is the same as the current yield for shares of common stock. Ans: B

Level: Intermediate

Subject: Capital Gain Yield

Type: Concepts

81. Given constant earnings per share, an increase in dividends will generally: A) Increase the dividend yield as well as the capital gains yield. B) Decrease the growth rate of the corporation and increase the current yield. C) Increase the dividend yield and decrease the current yield. D) Have no effect on either the capital gains yield or the total return. E) Have no effect on either the total return or the current yield. Ans: B

Level: Challenge

Subject: Dividends And Growth

Type: Concepts

82. Which of the following statements is (are) correct concerning preferred stock? I. A missed dividend payment never has to be paid if the preferred stock is cumulative. II. All preferred stock has an obligatory sinking fund. III. Preferred stock has a stated liquidation value. IV. Preferred stock is never callable. A) III only B) IV only C) III and IV only D) II, III, and IV only E) I, II, and III only Ans: A

Level: Intermediate

Subject: Preferred Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 16

Chapter 8 Stock Valuation

83. What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 12%, and the stock is expected to be worth $110 one year from now? A) $95 B) $100 C) $110 D) $115 E) $120 Ans: B

Level: Basic

Subject: Stock Price

Type: Problems

84. The dividend on Simple Motors common stock will be $2 in one year, $3.50 in two years, and $5.00 in three years. You can sell the stock for $75 in three years. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock today? A) $59.69 B) $64.65 C) $64.82 D) $65.66 E) $71.30 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

85. A stock that pays a constant dividend of $2.50 forever currently sells for $20. What is the required rate of return? A) 11.0% B) 11.5% C) 12.0% D) 12.5% E) 13.0% Ans: D

Level: Basic

Subject: Zero Growth Stock Return

Type: Problems

86. Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indefinitely. Returns on the stock of firms like NoGro are currently running 15%. What is the value of one share of stock? A) $2.90 B) $13.65 C) $19.33 D) $31.25 E) $39.70 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

87. ABC Company's preferred stock is selling for $25 a share. If the required return is 12%, what will the dividend be two years from now? A) $2.39 B) $2.50 C) $3.00 D) $3.30 E) $3.76 Ans: C

Level: Basic

Subject: Preferred Stock Dividend

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

88. The preferred stock of the Limbaugh Institute pays a constant annual dividend of $3 and sells for $20. You believe the stock will sell for $12 in one year. You must, therefore, believe that the required return on the stock will be ____ percentage points ___________ in one year. A) 8; higher B) 8; lower C) 9; higher D) 10; lower E) 10; higher Ans: E

Level: Basic

Subject: Preferred Stock Valuation

Type: Problems

89. What would you pay today for a stock that is expected to make a $1.50 dividend in one year if the expected dividend growth rate is 3% and you require a 16% return on your investment? A) $11.54 B) $12.33 C) $12.43 D) $13.14 E) $14.30 Ans: A

Level: Basic

Subject: Dividend Growth Model

Type: Problems

90. The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for one year from now? A) $127.06 B) $133.75 C) $143.11 D) $149.80 E) $152.78 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

91. Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 10%, what is the value of a share of Pale Hose? A) $14.00 B) $15.25 C) $25.80 D) $28.00 E) $29.40 Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

92. Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given a required return of 12%, the stock should today should sell for: A) $10.25 B) $12.50 C) $15.00 D) $16.25 E) $32.50 Ans: C

Level: Basic

Subject: Negative Dividend Growth Valuation

Type: Problems

93. Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given a required return is 12%, the price of the stock in two years will be: A) $9.45 B) $11.52 C) $13.82 D) $14.98 E) $29.95 Ans: C

Level: Basic

Subject: Negative Dividend Growth Valuation

Type: Problems

94. Llano's stock is currently selling for $50. The expected dividend one year from now is $1.50 and the required return is 10%. What is this firm's dividend growth rate assuming the constant dividend growth model is appropriate? A) 7% B) 8% C) 9% D) 10% E) None of the above. Ans: A

Level: Basic

Subject: Dividend Growth Rate

Type: Problems

95. The current price of XYZ stock is $50. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the required rate of return on XYZ stock? A) 9.0% B) 9.1% C) 9.3% D) 10.6% E) 11.2% Ans: B

Level: Basic

Subject: Required Returns

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 19

Chapter 8 Stock Valuation

96. ABC Corporation's common stock dividend yield is 2.1%, it just paid a dividend of $1, and is expected to pay a dividend of $1.07 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock? A) 9.0% B) 9.1% C) 9.3% D) 10.6% E) 11.2% Ans: B

Level: Basic

Subject: Required Returns

Type: Problems

97. Suppose that you have just purchased a share of stock for $22.50. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock? A) 5.00% B) 7.00% C) 10.25% D) 12.00% E) 13.67% Ans: D

Level: Basic

Subject: Required Returns

Type: Problems

98. Killnum Corp. announces that the dividend for the next year will be $2.50 per share rather than the originally expected $1.50 per share. From then on, it is expected that dividends will resume their historical constant growth rate of 5% per year. What would you expect to happen to the price of the stock? Ignore any tax effects. A) The price will likely double. B) The price will likely rise by less than 100%. C) The price will likely rise by exactly 50%. D) The price will remain unchanged. E) The price will likely rise by the present value of $1. Ans: B

Level: Basic

Subject: Dividend Growth Model

Type: Problems

99. McGonigal's Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends in three years. The first dividend will be $1 and dividends are expected to grow at 5% thereafter. Given a required return of 15%, what would you pay for the stock today? A) $7.18 B) $7.56 C) $8.29 D) $10.00 E) $10.50 Ans: B

Level: Basic

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 20

Chapter 8 Stock Valuation

100. McIntyre's Moats, Inc. currently pays no dividends, but the firm will begin paying dividends in three years. The first dividend will be $2.50 and dividends are expected to grow at 2% thereafter. Given a current market price of $55.62, what is the required return on the stock? A) 4% B) 5% C) 6% D) 7% E) 8% Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

101. McIver's Meals, Inc. currently pays a $1 annual dividend. Investors believe that dividends will grow at 15% next year, 10% annually for the two years after that, and 5% annually thereafter. Assume the required return is 10%. What is the current market price of the stock? A) $21.77 B) $22.99 C) $25.09 D) $26.13 E) $27.65 Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

102. Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will not subsequently change. Given a required return of 15%, what should the stock sell for today? A) $1.21 B) $2.15 C) $8.15 D) $42.00 E) $80.00 Ans: A

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

103. Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate annually thereafter. Given a required return of 15%, what should the stock should sell for today? A) $1.21 B) $1.64 C) $2.01 D) $4.39 E) $13.45 Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 21

Chapter 8 Stock Valuation

104. Suppose the Pale Hose Corp. is expected to pay a dividend next year of $1.75 per share. Both sales and profits for Pale Hose are expected to grow at a rate of 15% for the following two years and then at 2% per year thereafter indefinitely. Dividend growth is expected to match sales growth. If the required return is 14%, what is the value of a share of Pale Hose? A) $16.49 B) $16.98 C) $17.92 D) $18.49 E) $19.76 Ans: C

Level: Basic

Subject: Supernormal Growth

Type: Problems

105. Energistics, Inc. plans to retain and reinvest all of their earnings for the next three years; at the end of year 3 the firm will pay a special dividend of $5 per share. Beginning in year 4, the firm will begin to pay a dividend of $1 per share, which is expected to grow at a 3% rate annually forever. Given a required return of 12%, the stock should sell for _____ today. A) $11.47 B) $12.44 C) $13.15 D) $14.27 E) $15.01 Ans: A

Level: Basic

Subject: Stock Valuation

Type: Problems

106. Moore Money Inc. just paid a dividend of $2. The required return on the stock is 15%. If it has the following expected dividend growth rates what should the stock sell for? Year Growth 1&2 15% 3 12% 4+ 6% A) B) C) D) E)

$22.45 $26.17 $27.79 $28.89 $29.68

Ans: D

Level: Basic

Subject: Supernormal Growth

Type: Problems

107. Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 4%. At the end of year 5, Oly will issue its first dividend in the amount of $2 per share. If the required return is 16%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4. A) $7.49 B) $7.67 C) $8.17 D) $9.20 E) $9.91 Ans: D

Level: Intermediate

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 22

Chapter 8 Stock Valuation

108. Etling Inc.'s dividend is expected to grow at 6% for the next two years and then at 3% forever. If the current dividend is $3 and the required return is 16%, what is the price of the stock? A) $25.10 B) $25.82 C) $26.15 D) $27.58 E) $29.45 Ans: A

Level: Basic

Subject: Supernormal Growth

Type: Problems

109. CBC stock is expected to sell for $22 two years from now. Supernormal growth of 5% is expected for the next two years. The current dividend is $1 and the required return is 15%. What constant growth rate is expected beginning in year 3? A) 6.5% B) 6.7% C) 8.1% D) 8.4% E) 9.5% Ans: E

Level: Intermediate

Subject: Supernormal Growth Valuation

Type: Problems

110. If Russian Motors closed at $22 and the current quarterly dividend is $1.25, what % yield would be reported in The National Post? A) 5.7% B) 6.5% C) 9.1% D) 22.2% E) 22.7% Ans: E

Level: Intermediate

Subject: Percent Yield

Type: Problems

111. A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What is the dividend the firm is expected to pay in one year if the current stock price is $40? A) $2.00 B) $2.40 C) $2.80 D) $3.20 E) $3.60 Ans: B

Level: Basic

Subject: Dividend Yield

Type: Problems

112. A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What dividend did the firm just pay if the current stock price is $40? A) $2.18 B) $2.31 C) $2.50 D) $2.87 E) $3.60 Ans: B

Level: Basic

Subject: Dividend Yield

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

113. Saskatchewan Steel, Ltd. and Alberta Copper, Inc. both recently announced earnings of $400,000. Both companies have common shares outstanding of 250,000 and rates of return of 10%. Saskatchewan Steel has a new project that will generate net cash flows of $50,000 per year forever. Alberta Copper has a new project that will generate net cash flows of $40,000 per year forever. The stock price of Saskatchewan Steel should be _______ greater than the stock price of Alberta Steel. A) $0.04 B) $0.40 C) $3.60 D) $10,000 E) $100,000 Ans: B

Level: Intermediate

Subject: Growth Opportunities

Type: Problems

114. There is an election being held to fill two seats on the board of directors of a firm in which you hold stock. There are a total of 420 shares outstanding. If the election is conducted under cumulative voting and you own 120 shares, how many more shares must you buy to be assured of earning a seat on the board? A) 0 B) 20 C) 21 D) 91 E) 141 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

115. Four directors will be elected and you wish to be one of them. With cumulative voting, what percentage of the shares (plus one) do you need to have on your side to guarantee you a seat? A) 12.5% B) 16.7% C) 20.0% D) 25.0% E) 33.3% Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

116. A firm has 200,000 shares outstanding. If three directors will be elected, how many shares do you need to control to assure yourself a seat on the board under cumulative voting procedures? A) 30,001 B) 40,001 C) 50,001 D) 66,668 E) 100,001 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 24

Chapter 8 Stock Valuation

117. Suppose you own 500 shares of Biogen common stock. Two directors are to be elected. Since the firm uses cumulative voting, you can cast as many as _____________ votes for a single director. A) 100 B) 250 C) 500 D) 750 E) 1,000 Ans: E

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

118. Your firm is converting from cumulative voting to straight voting. You currently own the minimum number of shares needed to assure yourself a seat on the board in any election under cumulative voting. How many more shares must you purchase in order to assure yourself a seat under straight voting? Assume there are a total of 500,000 shares outstanding and that three directors go up for election at a time. A) 0 B) 25,000 C) 125,000 D) 250,000 E) 250,001 Ans: C

Level: Intermediate

Subject: Straight Voting

Type: Problems

Use the following to answer questions 119-126:

Hi 126.25

52 Weeks Lo 72.50

Yld Stock Big Hat

Sym BH

Di v 1.30

%

PE

1.32

16

Vol 100s

20925 98.38

119. Big Hat must have closed at _________ per share on the previous trading day. A) $97.38 B) $98.26 C) $99.88 D) $98.13 E) $98.50 Ans: B

Level: Basic

Subject: Common Stock Quote

Type: Problems

120. For the current year, the expected dividend per share is: A) $1.10 B) $1.30 C) $1.32 D) $2.10 E) $4.40 Ans: B

Level: Basic

Subject: Dividend Per Share

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Hi

Page 25

Lo

Close

Chg.

97.88

98.13

-.13

Chapter 8 Stock Valuation

121. Assume the expected growth rate in dividends is 7%. Then the constant growth model suggests that the required return on Big Hat stock is: A) 7.4% B) 7.9% C) 8.0% D) 8.4% E) 9.8% Ans: D

Level: Basic

Subject: Required Returns

Type: Problems

122. Based on the quote, a good estimate of EPS over the last four quarters is: A) $0.16 B) $3.29 C) $6.13 D) $8.45 E) $9.76 Ans: C

Level: Basic

Subject: Earnings Per Share

Type: Problems

123. On this trading day, the number of Big Hat shares which changed hands was: A) 209 B) 2,092 C) 20,925 D) 209,250 E) 2,092,500 Ans: E

Level: Basic

Subject: Trading Volume

Type: Problems

124. Assume that Big Hat paid a $1.12 annual dividend in the previous period. What is the dividend growth rate based on this quote? A) 1.16% B) 12.20% C) 14.15% D) 16.07% E) 16.29% Ans: D

Level: Basic

Subject: Dividend Growth Rate

Type: Problems

125. You believe that the required return on Big Hat stock is 12% and that the expected dividend growth rate is 10%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced? A) Overvalued B) Undervalued C) Fairly priced D) Cannot tell without more information Ans: A

Level: Intermediate

Subject: Stock Valuation

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 26

Chapter 8 Stock Valuation

126. Assume that Big Hat is selling at its equilibrium price. Also assume that dividends are expected to grow at a constant rate of 25% for the foreseeable future. What is the required return on the stock? A) 18.5% B) 22.7% C) 24.1% D) 24.7% E) 26.7% Ans: E

Level: Intermediate

Subject: Required Returns

Type: Problems

Use the following to answer questions 127-130: Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%. 127. The price of Bradley Broadcasting stock today should be A) $18.48 B) $19.12 C) $20.33 D) $21.46 E) $22.56 Ans: C

Level: Basic

Subject: Stock Valuation

Type: Problems

128. What is growth rate of the Bradley Broadcasting dividend during year 2? A) 10% B) 15% C) 20% D) 25% E) 50% Ans: A

Level: Basic

Subject: Stock Valuation

Type: Problems

129. How much is Bradley's stock price expected to increase during the first year? A) 1.05% B) 4.59% C) 5.15% D) 6.24% E) 6.51% Ans: B

Level: Intermediate

Subject: Stock Valuation

Type: Problems

130. What is expected capital gains yield on Bradley Broadcasting stock during year 8? A) 3% B) 4% C) 9% D) 10% E) 14% Ans: B

Level: Intermediate

Subject: Stock Valuation

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 27

Chapter 8 Stock Valuation

131. The Johnson Company just paid an annual dividend of $1.60. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a 9% rate of return? A) $14.40 B) $16.33 C) $17.78 D) $18.21 E) $19.38 Ans: C

Level: Basic

Subject: Stock Value

Type: Problems

132. Alhandro, Inc. just paid an annual dividend of $1.03. They have been increasing their dividends by 4% annually and are expected to continue doing so. How much can they expect to receive for each new share of stock offered if investors require an 11% rate of return? A) $9.36 B) $9.74 C) $14.71 D) $15.30 E) $15.91 Ans: D

Level: Intermediate

Subject: Stock Value

Type: Problems

133. The KLS Co. is expected to pay the following annual dividends for the next three years: $1.00, $1.50, and $1.60, respectively. After that time, they are expected to increase their dividends by 3% annually. Stocks similar to KLS are yielding 9.5%. What is one share of KLS worth today? A) $22.69 B) $23.87 C) $27.05 D) $27.30 E) $29.20 Ans: A

Level: Intermediate

Subject: Value Of Non-Constant Dividend

Type: Problems

134. The Brown Company just announced that they will be increasing their annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay for one share of the Brown Company stock if you require a 12% rate of return? A) $14.35 B) $14.63 C) $17.68 D) $18.13 E) $19.81 Ans: C

Level: Intermediate

Subject: Stock Value

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

135. The MIKO Corp. paid $0.84 in dividends last year. They have just announced that they expect to increase their dividends by 2% each year for the foreseeable future. Currently, MIKO stock is priced at $21.32 per share. What is the rate of return on MIKO stock? A) 4.01% B) 4.96% C) 5.86% D) 5.94% E) 6.02% Ans: E

Level: Intermediate

Subject: Required Return

Type: Problems

136. Swanson Brothers expects to pay a $2.20 dividend next year which is an increase of 3.25% over the prior year. After next year, dividends are projected to grow at a steady rate of 2.5%. Shares of Swanson stock are currently selling at $15.80 per share. What is the rate of return on Swanson stock? A) 14.27% B) 16.42% C) 16.77% D) 17.17% E) 23.66% Ans: B

Level: Intermediate

Subject: Required Return

Type: Problems

137. Shares of Blue Dye, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Blue Dye have been increasing at a rate of 2.4% and are expected to continue at this rate. What is the expected amount of the next dividend? A) $1.37 B) $1.91 C) $2.41 D) $2.87 E) $2.93 Ans: E

Level: Intermediate

Subject: Dividend Amount

Type: Problems

138. Morris, Inc. has some 8% preferred stock outstanding. How much are you willing to pay for one share of Morris preferred stock if you require a 7% rate of return? A) $87.50 B) $98.11 C) $114.29 D) $123.87 E) $125.14 Ans: C

Level: Basic

Subject: Dividend Amount

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 29

Chapter 8 Stock Valuation

139. Noshima Industries issued dividends totaling $0.60 last year. For the next two years, they expect dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Noshima Industries stock worth today if you require a 9% rate of return? A) $13.45 B) $13.77 C) $14.59 D) $15.00 E) $15.14 Ans: C

Level: Intermediate

Subject: Nonconstant Dividend

Type: Problems

140. MDK, Inc. is a high growth firm that has never paid a dividend. The company just issued a press release stating that next year they plan on paying an annual dividend of $0.34. They also stated that dividends are expected to increase by 40% a year for each of the following four years and then increase by 4% annually thereafter. The required rate of return on this stock is 15%. What is the expected price per share of MDK stock six years from now? A) $9.12 B) $9.42 C) $12.35 D) $12.84 E) $14.14 Ans: D

Level: Challenge

Subject: Nonconstant Dividend

Type: Problems

141. Mahenterin Inc. is expecting to pay $1.23, $0.99, and $1.13 in annual dividends for the next three years respectively. After that, they project that dividends will increase by 1.5% annually. Andy is in the 25% marginal tax bracket and wants to earn 6% after-tax on his investments. How much is Andy willing to pay today for one share of Mahenterin Inc. stock? A) $16.90 B) $17.04 C) $17.31 D) $17.36 E) $17.81 Ans: A

Level: Challenge

Subject: Nonconstant Dividend

Type: Problems

142. Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michaels wishes to sell some new preferred stock at par, what rate should they assign to the new shares? A) 6.76% B) 7.24% C) 8.05% D) 9.00% E) 11.19% Ans: B

Level: Intermediate

Subject: Preferred Stock Value

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

143. Jamie just paid $8,239 for 100 shares of 6% preferred stock. What rate of return will she earn? A) 4.94% B) 7.28% C) 8.24% D) 10.94% E) 713.73% Ans: B

Level: Intermediate

Subject: Preferred Stock Rate Of Return

Type: Problems

144. The daily newspaper lists this information on a stock: Last $36.19, Net Chg -1.63 and Yld % 1.3. What is the amount of the current dividend? A) $0.44 B) $0.45 C) $0.47 D) $0.49 E) $0.52 Ans: C

Level: Intermediate

Subject: Stock Quote

Type: Problems

145. ABC, Inc. has earnings per share of $1.44. The newspaper shows a P/E of 23 and a dividend of $1.39 for shares of ABC, Inc stock. What is the dividend yield? A) 3.6% B) 3.8% C) 3.9% D) 4.2% E) 4.3% Ans: D

Level: Intermediate

Subject: Stock Quote

Type: Problems

146. Leon purchased 1,000 shares of LJK stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Leon's required rate of return is 13% on this type of investment. What is the capital gains yield on LJK stock? A) 7.41% B) 8.72% C) 9.06% D) 13.85% E) 16.94% Ans: B

Level: Intermediate

Subject: Growth Rate

Type: Problems

147. ABC stock closed yesterday at a price of $39.80 a share. The price today was down $2.10. ABC pays a $0.48 annual dividend which has remained constant for five years. What is the current dividend yield today? A) 1.15% B) 1.21% C) 1.27% D) 1.31% E) 1.33% Ans: C

Level: Intermediate

Subject: Dividend Yield

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

148. An 8% preferred stock closed yesterday at a price of $91.32. The stock closed today at par. What is the current dividend yield? A) 7.31% B) 7.50% C) 8.00% D) 8.76% E) 8.80% Ans: C

Level: Basic

Subject: Dividend Yield

Type: Problems

149. Marcy owns 100 shares of Dee's Inc. while Teri owns 300 shares and Lucie owns 500 shares. There are currently three seats open on the board of directors. With straight voting, how many additional shares will Marcy have to buy from Terri or Lucie to guarantee that she will be elected to the board? A) 0 B) 1 C) 151 D) 201 E) 351 Ans: E

Level: Intermediate

Subject: Straight Voting

Type: Problems

150. There are 5 seats open on the board of directors of Alpha, Inc. Jason wants to be positive that he can be elected to one of these positions. Alpha uses straight voting. There are 1,500 shares of Alpha stock outstanding. Twenty percent of the shares are owned by Midge, 30% are owned by Peter, 10% are owned by Jeff, 25% are owned by Jason and the rest are owned by Edward. How many additional shares of stock must Jason buy to ensure that he wins a seat? A) 0 B) 251 C) 298 D) 376 E) 411 Ans: D

Level: Intermediate

Subject: Straight Voting

Type: Problems

151. Marcy owns 100 shares of Dee's Inc. while Teri owns 300 shares and Lucie owns 500 shares. There are currently three seats open on the board of directors. With cumulative voting, how many additional shares will Marcy have to buy from Teri or Lucie to guarantee that she will be elected to the board? A) 0 B) 63 C) 126 D) 256 E) 351 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 32

Chapter 8 Stock Valuation

152. There are 5 seats open on the board of directors of Alpha, Inc. Jason wants to be positive that he can be elected to one of these positions. Alpha uses cumulative voting. There are 1,500 shares of Alpha stock outstanding. Twenty percent of the shares are owned by Midge, 30% are owned by Peter, 10% are owned by Jeff, 25% are owned by Jason and the rest are owned by Edward. How many additional shares of stock must Jason buy to ensure that he wins a seat? A) 0 B) 56 C) 116 D) 251 E) 376 Ans: A

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

153. Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative voting? A) 625 B) 626 C) 834 D) 1250 E) 1251 Ans: A

Level: Intermediate

Subject: Straight Versus Cumulative Voting

Type: Problems

154. The Battery Co. paid $1.20 in dividends last year. Margaret paid a price of $15.00 a share for Battery Co. stock and has an expected return of 8% on this investment. What is the growth rate of the Battery Co. stock? A) 0% B) 4% C) 8% D) 12% E) 16% Ans: A

Level: Intermediate

Subject: Zero Growth Stock

Type: Problems

155. List and briefly explain the three special cases in which we can come up with a value for a share of stock. Ans: The three cases are: zero growth, constant growth, and cases where the dividend grows at a constant rate after some length of time. The zero growth case is a simple perpetuity, the constant growth case is a straightforward application of the dividend growth model, and the third case requires using the nonconstant dividend growth model. Level: Basic

Subject: Stock Valuation

Type: Essays

156. Consider a share of stock that pays a dividend of $1 at the end of one year, $2 at the end of two years, and then dividends grow at a constant rate of 5% per year thereafter. If the required return is 10%, we can value this share of stock by finding P2 using D3, then find P0 = D1/1. 1 + D2/1. 12 + P2/1. 12. In this formula, it appears as though we ignore all dividends from year three on. Why is this so? Ans: We actually don't ignore any dividends. When we compute P2 we incorporate dividend number three, but also all dividends from that point forward) Thus, we have included all dividends in the stock valuation, which is required in order to determine the value of a share. Level: Basic

Subject: Nonconstant Dividend Growth

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 33

Chapter 8 Stock Valuation

157. What are the components of the required rate of return on a share of stock? Briefly explain each. Ans: The two components are dividend yield, which measures the annual percentage income return on the stock, and the capital gains yield, which is the percentage price appreciation (or depreciation) of the stock. Level: Basic

Subject: Required Returns

Type: Essays

158. Briefly explain the differences between preferred and common stock. Ans: Common stockholders have the right to vote on corporate matters and have the right to receive the residual value of the firm after all liabilities and preferred stockholders are paid in a liquidation. Preferred stockholders have a promised dividend, may or may not have the right to collect dividends that have been passed, and preferred stock will typically be rated much like bonds. In a liquidation, preferred shareholders have a preference over common stockholders. Level: Basic

Subject: Preferred vs. Common Stock

Type: Essays

159. Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why. Ans: Bonds, unlike stocks, have a final maturity date and promised payments at fixed periods of time. For stocks, the only valuation model we have up to this point in the text is the dividend growth model which requires estimation of a dividend growth rate and also requires that certain conditions be met before the dividend growth model can be applied. Normally, all of the information required to find the yield on a publicly traded bond is publicly available while only the price and most current dividend are available for stocks. Level: Basic

Subject: Stocks vs. Bonds

Type: Essays

160. A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain. Ans: Our basic principle of stock valuation is that the value of a share of stock is simply equal to the present value of all of the expected dividends on the stock. According to the dividend growth model, an asset that has no expected cash flows has a value of zero, so if investors are willing to purchase shares of stock in firms that pay no dividends, they evidently expect that the firms will begin paying dividends at some point in the future. Level: Intermediate

Subject: Zero-Dividend Stocks

Type: Essays

161. A firm has two classes of common stock outstanding:Class A, which carries voting rights of 10 votes per share but receives no dividends (ever), and Class B, which carries voting rights of one vote per share and pays dividends whenever they are declared by the board. Which would you be willing to pay more for and why? Ans: This is a very open-ended question to get the students thinking about the differing interests of investors. Management of the firm would likely prefer Class A while investors interested in dividends would likely prefer Class B shares. The Class B shares with their ordinary voting rights and dividends can be valued using the dividend growth model but the Class A shares, whose value is derived completely from the voting rights, would be very difficult to value. Level: Challenge

Subject: Classes Of Stock

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 34

Chapter 8 Stock Valuation

162. A firm has common and preferred stock outstanding, both of which just paid a dividend of $3 per share)Which do you think will have a higher share price and why? If the firm also has an issue of noncallable debentures outstanding, which do you think investors will require a higher return on, the debentures or the shares of common stock? Explain. Ans: This question sets up some of the material addressed later in the chapter. First, the share of common stock will be worth more since dividends will typically be expected to increase while they will not on the preferred shares. The investor-required return will be higher for the stock since bonds have promised payments and preference over stock in liquidation. The astute student will make the connection that bondholder returns are effectively limited while stockholder returns are effectively not. Level: Challenge

Subject: Required Returns

Type: Essays

163. Explain how supernormal growth of dividends is possible, but only in the short-term. Ans: Supernormal growth is often associated with young, rapidly growing firms which have not previously paid a dividend. When these firms begin to pay dividends, the amount is often small. Therefore, it only requires a small increase in the dividend amount to equate to a large increase in percentage terms. As the dividend amount increases, the same percentage increase would cost significantly more in dollar terms. For example, a $0.05 increase to a $0.10 dividend is a 50% increase. For a $2.00 dividend to increase by 50%, the dividend amount would have to rise by $1.00. It is a lot easier to afford a $0.05 increase than a $1.00 increase. Thus, firms can not afford too many years of supernormal growth. Level: Intermediate

Subject: Supernormal Growth

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 35

View more...
Level: Basic

Subject: Stock Valuation

Type: Concepts

2. If one uses the constant growth model to value stock, one assumes that P1 = P0 ´ (1 + g), P2 = P0 ´ (1 + g), etc. Ans: False

Level: Basic

Subject: Stock Valuation

Type: Concepts

3. According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate. Ans: True

Level: Basic

Subject: Stock Valuation

Type: Concepts

4. If a firm experiences a financial loss for the year, the loss is shared equally by the debtholders and equityholders. Ans: False

Level: Basic

Subject: Returns to Security Holders

Type: Concepts

5. A dividend on common stock, whether declared or not, is not a legal liability of the firm. Ans: False

Level: Basic

Subject: Dividends

Type: Concepts

6. For income tax purposes, preferred stock is more like debt than it is like common stock. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

7. Most preferred stocks have dividends that are cumulative. Ans: True

Level: Basic

Subject: Preferred Stock

Type: Concepts

8. Dividends on preferred stock are deductible from taxable income of the issuing firm. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

9. A firm must make its dividend payments to preferred shareholders before it makes any interest payments to its bondholders. Ans: False

Level: Basic

Subject: Preferred Stock

Type: Concepts

10. The partial excludability of dividend income from taxable income makes preferred stock less desirable to purchasers than it might otherwise be. Ans: False

Level: Basic

Subject: Dividends

Type: Concepts

11. The price-earnings ratios for TSX stocks which are listed in The National Post are based on earnings per share for the past year. Ans: True

Level: Basic

Subject: Stock Quotation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 1

Chapter 8 Stock Valuation

12. 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. Ans: A

Level: Basic

Subject: Growing Perpetuity

Type: Definitions

13. The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the: A) Zero growth model. B) Dividend growth model. C) Capital Asset Pricing Model. D) Earnings capitalization model. E) Perpetual growth model. Ans: B

Level: Basic

Subject: Dividend Growth Model

Type: Definitions

14. A stock's next expected dividend divided by the current stock price is the: A) Current yield. B) Total yield. C) Dividend yield. D) Capital gains yield. E) Earnings yield. Ans: C

Level: Basic

Subject: Dividend Yield

Type: Definitions

15. The rate at which the stock price is expected to appreciate (or depreciate) is the: A) Current yield. B) Total yield. C) Dividend yield. D) Capital gains yield. E) Earnings yield. Ans: D

Level: Basic

Subject: Capital Gains Yield

Type: Definitions

16. Equity without priority for dividends or in the event of bankruptcy is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: E

Level: Basic

Subject: Common Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 2

Chapter 8 Stock Valuation

17. The term __________ is usually applied to stock that has no special preference either in paying dividends or in bankruptcy. A) preferred stock B) debenture C) common stock D) cumulative voting E) proxy Ans: C

Level: Basic

Subject: Common Stock

Type: Definitions

18. Preemptive rights refers to: A) The right of shareholders to share proportionately in dividends paid. B) The right of shareholders to share proportionately in any new stock issues sold. C) The right of shareholders to share proportionately in liquidated assets. D) The right of shareholders to vote at annual shareholder meetings. E) None of the above. Ans: B

Level: Basic

Subject: Preemptive Rights

Type: Definitions

19. 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. Ans: C

Level: Basic

Subject: Dividends

Type: Definitions

20. Equity with differential voting rights and/or dividend payment claims is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: A

Level: Basic

Subject: Dual Class Stock

Type: Definitions

21. Equity with priority for dividends and in the event of bankruptcy is called: A) Dual class stock. B) Cumulative stock. C) Deferred stock. D) Preferred stock. E) Common stock. Ans: D

Level: Basic

Subject: Preferred Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 3

Chapter 8 Stock Valuation

22. The short alphabetic abbreviation for an exchange-listed stock by which the issue is identified in the market is called the stock's _____________. A) open name B) trading range C) exchange name D) ticker symbol E) price/earnings description Ans: D

Level: Basic

Subject: Ticker Symbol

Type: Definitions

23. The voting procedure where shareholders may cast all of their votes for one member of the board is: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: B

Level: Basic

Subject: Cumulative Voting

Type: Definitions

24. The voting procedure where shareholders may cast all of their votes for each member of the board is: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: C

Level: Basic

Subject: Straight Voting

Type: Definitions

25. The voting procedure where shareholders grant authority to another individual to vote their shares is called: A) Democratic voting. B) Cumulative voting. C) Straight voting. D) Deferred voting. E) Proxy voting. Ans: E

Level: Basic

Subject: Proxy Voting

Type: Definitions

26. A stock whose price can be computed by dividing the annual dividend amount by the required rate of return is called a _______growth stock. A) Constant B) Supernormal C) Zero D) Capital gains E) Dividend Ans: C

Level: Basic

Subject: Zero Growth Stock

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 4

Chapter 8 Stock Valuation

27. Preferred stock is a type of _______ growth stock. A) Constant B) Zero C) Supernormal D) Capital gains E) Dividend Ans: B

Level: Basic

Subject: Preferred Stock

Type: Definitions

28. Given a price at year 5, the dividend in the dividend growth model would be defined as: A) The last annual dividend paid. B) The annual dividend in year 1. C) The quarterly dividend in year 5. D) The quarterly dividend in year 6. E) The annual dividend in year 6. Ans: E

Level: Basic

Subject: Dividend Time Period

Type: Definitions

29. The capital gains yield as used in the dividend growth model is defined as: A) D0 / P0. B) D1 / P0. C) g / r. D) g. E) g / P0. Ans: D

Level: Basic

Subject: Capital Gains Yield

Type: Definitions

30. The procedure which has the effect of permitting minority participation in voting is called ____ voting. A) Proxy B) Cumulative C) Straight D) Preferred E) Freeze out Ans: B

Level: Basic

Subject: Cumulative Voting

Type: Definitions

31. A cumulative dividend is defined as a dividend that is: A) Carried forward as an arrearage if not paid. B) Payable only if current operations generate sufficient cash in a year to pay the dividend. C) Paid only to senior holders of common stock. D) Treated as an interest expense. E) Paid as an extra payment if the share of stock is called. Ans: A

Level: Basic

Subject: Cumulative Dividends

Type: Definitions

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 5

Chapter 8 Stock Valuation

32. Which of the following is true of non-voting common stock? A) It is not legal in Canada to issue common stock without voting rights. B) A "coattail" provision requires that 2/3 of all common stock carry voting rights. C) Non-voting common stockholders must be paid a dividend each year. D) Non-voting shares must receive dividends no lower than dividends on voting shares. E) Non-voting shares commonly sell at a premium over voting shares. Ans: D

Level: Basic

Subject: Non-voting Common Stock

Type: Definitions

33. The required return is defined as: A) The capital gains yield plus the dividend yield. B) Next year's dividend divided by the current price. C) The increase in the value of a share of stock over a period of time. D) The rate at which a stock increases in value. E) The payment by a corporation to shareholders in the form of cash or stock. Ans: A

Level: Basic

Subject: Required Return

Type: Definitions

34. A grant of authority by a shareholder allowing for another individual to vote his/her shares is a _____________. A) preferred stock B) proxy C) specialist D) cumulative voting right E) dual class stock Ans: B

Level: Basic

Subject: Proxy Voting

Type: Concepts

35. Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds? I. Future cash flows on stocks are not known in advance. II. Common stocks don't have a maturity date. III. Common stock valuation is sensitive to estimates of the dividend growth rate. A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans: E

Level: Basic

Subject: Stock & Bond Valuation

Type: Concepts

36. Which of the following is true about the differences between debt and common stock? A) Debt is ownership in a firm but equity is not. B) Creditors have voting power while stockholders do not. C) Periodic payments made to either class of security are tax deductible for the issuer. D) Interest payments are promised while dividend payments are not. E) Bondholders can also own equity, but not vice versa. Ans: D

Level: Basic

Subject: Debt vs. Equity

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 6

Chapter 8 Stock Valuation

37. You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the ___________ model. A) zero growth B) supernormal growth C) nonconstant growth D) growing perpetuity E) bond pricing Ans: A

Level: Basic

Subject: Common Stock Valuation

Type: Concepts

38. Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30, respectively. This pattern is expected to continue into the future. This is an example of a company paying a: A) Dividend that grows by 10% each year. B) Dividend that grows at a constant rate. C) Dividend that grows by a decreasing amount. D) Dividend that grows at a decreasing rate. E) Preferred stock dividend. Ans: D

Level: Basic

Subject: Dividend Growth

Type: Concepts

39. Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can calculate ____________. I. the price today II. the price five years from now III. the dividend that is expected to be paid 10 years from now A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

40. Which of the following is (are) true? I. The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stock's required return. II. A decrease in the dividend growth rate will increase a stock's market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. A) I only B) III only C) II and III only D) I and III only E) I, II, and III Ans: B

Level: Basic

Subject: Stock Valuation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 7

Chapter 8 Stock Valuation

41. You are attempting to value a stock in an industry where firms are generating exceptional dividend growth, but this growth is expected to slow to an equilibrium growth rate in about five years. Of the stock valuation models studied, the most appropriate is the _______________. A) perpetuity model B) constant growth model C) supernormal growth model D) perpetual growth model E) preferred stock model Ans: C

Level: Basic

Subject: Stock Valuation

Type: Concepts

42. As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ________________. A) capital gains yield and a dividend growth rate B) capital gains growth rate and a dividend growth rate C) dividend payout ratio and a required rate of return D) dividend yield and the present dividend E) dividend yield and a capital gains yield Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

43. Which of the following is (are) true? I. The dividend yield on a stock is the annual dividend divided by the par value. II. When the constant dividend growth model holds, g = capital gains yield. III. The total return on a share of stock = dividend yield + capital gains yield. A) I only B) II only C) I and II only D) II and III only E) I, II, and III Ans: D

Level: Basic

Subject: Stock Yields

Type: Concepts

44. Given no change in required returns, the price of a stock whose dividend is constant will: A) Increase over time at a rate of r%. B) Decrease over time at a rate of r%. C) Increase over time at a rate equal to the dividend growth rate. D) Decrease over time at a rate equal to the dividend growth rate. E) Remain unchanged. Ans: E

Level: Basic

Subject: Stock Valuation

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 8

Chapter 8 Stock Valuation

45. Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is I. D5/(r - g) II. P0 ´ (1 + g)4 III. D0 ´ (1 + g)/(r - g) A) I only B) II only C) I and II only D) I and III only E) I, II, and III Ans: C

Level: Basic

Subject: Stock Valuation

Type: Concepts

46. You are attempting to value the shares of a new, high-technology firm in a developing industry. You would MOST likely A) use the growth dividend model B) use the non-constant growth dividend model C) use the zero growth dividend model D) find the value by valuing the stock as a perpetuity E) not be able to value this company Ans: B

Level: Basic

Subject: Stock Valuation

Type: Concepts

47. Which of the following common shareholder rights kicks in when a merger is proposed? A) The right to share proportionately in dividends paid. B) The right to share proportionately in remaining assets from a liquidation. C) The right to vote for directors. D) Preference over preferred shareholders in the payment of dividends. E) The right to vote on shareholder matters of great importance. Ans: E

Level: Basic

Subject: Common Shareholder Rights

Type: Concepts

48. Which of the following is NOT usually a right of a common stockholder? A) Right of first refusal to buy new preferred stock, when issued B) Preemptive right C) Right to receive proportionate dividends, when paid D) Right to claim proportionate remaining assets from a liquidation E) Right to vote by proxy Ans: A

Level: Basic

Subject: Common Stock Rights

Type: Concepts

49. You just voted against a merger proposal made by another corporation. You must own: A) Preferred stock. B) Debentures. C) Common stock. D) Cumulative dividend stock. E) Class B stock. Ans: C

Level: Basic

Subject: Common Shareholder Rights

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 9

Chapter 8 Stock Valuation

50. As a common shareholder in a firm, which of the following allows you to share proportionately in any new stock sold? A) Proxy voting B) Preemptive right C) Cumulative voting D) Straight voting E) Dual class stock Ans: B

Level: Basic

Subject: Preemptive Rights

Type: Concepts

51. Which of the following is/are true about common stock dividends? I. Payment of dividends is a tax deductible business expense for a corporation. II. Dividends that have been declared but are not yet paid are liabilities of the corporation. III. Dividends received by both individuals and corporations are fully taxable. A) II only B) III only C) I and III only D) II and III only E) I, II, and III Ans: A

Level: Basic

Subject: Dividends

Type: Concepts

52. Which of the following statements about dividends is false? A) Preferred stock dividends often represent a tax-advantaged investment for some corporations. B) Dividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by shareholders. C) The payment of dividends is at the discretion of the board of directors. D) The payment of dividends by the corporation is not a tax-deductible business expense. E) A corporation can be sued for not paying undeclared dividends. Ans: E

Level: Basic

Subject: Dividends

Type: Concepts

53. The primary reason for creating dual or multiple classes of stock has to do with: A) Exchange listing requirements. B) Satisfying TSX bylaws. C) Freezing out minority shareholders. D) Paying for acquisitions. E) Control of the firm. Ans: E

Level: Basic

Subject: Classes Of Stock

Type: Concepts

54. Often, a firm creates a second class of stock that has ___________ as compared with the first class. A) a lower priority in liquidation B) the right to cumulative dividends C) unequal voting rights D) a preemptive E) cumulative voting power Ans: C

Level: Basic

Subject: Classes Of Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 10

Chapter 8 Stock Valuation

55. Which of the following is NEVER a right of an owner of a share of preferred stock? I. The right to share proportionately in preferred dividends paid. II. The right to share proportionately in remaining assets from a liquidation. III. The right to vote for directors. A) I only B) III only C) I and II only D) II and III only E) I and III only Ans: B

Level: Basic

Subject: Preferred Shareholder Rights

Type: Concepts

56. Which of the following does NOT correctly complete this sentence: Preferred stock is much like debt in that ______________. A) both frequently carry credit ratings B) both can be repaid using a sinking fund C) both receive a stated payment from the corporation during the year D) both payments are subject to the same tax treatment for the issuing firm E) the holders of both get a stated payment in the event of a liquidation Ans: D

Level: Basic

Subject: Preferred Stock

Type: Concepts

57. Which of the following is a true statement regarding publicly traded stocks and bonds? A) A share of preferred stock is generally easier to value than a share of common stock. B) The price of a stock is greater than the present value of all future dividends. C) Stock dividends are a legally-binding liability of the corporation. D) A share of preferred stock represents an ownership interest in a corporation. E) Preferred stock is more like common stock than it is like a bond. Ans: A

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

58. Which of the following typically applies to preferred stock but NOT to common stock? A) Par value B) Dividend yield C) Cumulative dividends D) It is legally considered equity E) The dividends are a tax-deductible expense Ans: C

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

59. Which of the following terms is typically associated with BOTH preferred stock and common stock? A) Proxy B) Voting rights C) Dividend yield D) Arrearage E) Cumulative voting Ans: C

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 11

Chapter 8 Stock Valuation

60. Which of the following is NOT a right of an owner of a share of common stock? A) The right to share proportionately in dividends paid. B) The right to share proportionately in remaining assets from a liquidation. C) The right to vote for directors. D) Preference over preferred shareholders in the payment of dividends. E) The right to vote on stockholder matters of great importance. Ans: D

Level: Basic

Subject: Common Stock vs. Preferred

Type: Concepts

61. Which of the following would be considered a violation of the rights of one or more classes of a firm's stakeholders? A) Common dividends are paid even though preferred dividends are in arrears. B) Preferred stockholders are paid before common shareholders in a liquidation. C) Common stockholders are able to place members on the board of directors to represent their interests in opposition to the board candidates backed by preferred shareholders. D) Common shareholders are able to vote by proxy even when they are unable to attend a shareholders' meeting in person. E) Debt is repaid before preferred shareholders are paid anything in a liquidation. Ans: A

Level: Basic

Subject: Priority Of Payments

Type: Concepts

62. Which of the following items does NOT usually appear in a National Post common stock quote? A) capital gains rate B) dividend yield C) closing price D) high and low price for the trading day E) number of shares traded (volume) Ans: A

Level: Basic

Subject: Stock Market Reporting

Type: Concepts

63. If two stocks have the same earnings per share and required rate of return, differences in the ____________ of the two companies can account for different stock prices. A) voting rights B) growth opportunities C) number of shares outstanding D) number of directors E) value of preferred stock Ans: B

Level: Basic

Subject: Growth Opportunities

Type: Concepts

64. ____________ can freeze out minority shareholders. A) Straight voting B) Cumulative dividends C) Proxy voting D) Cumulative voting E) Multiple classes of stock Ans: A

Level: Basic

Subject: Straight Voting

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 12

Chapter 8 Stock Valuation

65. You wish to be on the board of directors of a company. If you wish to buy as low a percentage of the total outstanding shares as is necessary to guarantee yourself a seat on the board, you should look for a firm that has ____________. A) cumulative preferred stock B) cumulative voting Class B stock C) convertible debentures D) straight voting common stock E) cumulative voting common stock Ans: E

Level: Basic

Subject: Cumulative Voting

Type: Concepts

66. It is more difficult to value a stock than it is to value a bond because: A) The future cash flows of a stock are known. B) The life of an equity security is limited. C) The required market rate of return on a stock is known in advance. D) Equity securities have no maturity date. E) The maturity value of a stock is known. Ans: D

Level: Intermediate

Subject: Common Stock Valuation

Type: Concepts

67. The ABC Co. has paid annual dividends of $0.30, $0.64, $1.20, and $1.45 over the past four years. Dividends in the future are expected to grow at a constant rate of 3.5%. Which one of the following formulas should be used to compute the value of the stock today? A) P0 = D1 / (1+r)1 + D2 / (1+r)2 ... + Dn / (1+r)n + Pn / (1+r)n B) P0 = D / r C) P0 = D1 / (1+r)n + g D) P0 = D1 / (r - g) E) P0 = D1 / (r - g) n Ans: D

Level: Intermediate

Subject: Dividend Growth Model

Type: Concepts

68. A supernormal growth stock generally: A) Is associated with a company that is experiencing rapid contraction. B) Tends to increase its dividends per share by 30% or more for an extended number of years. C) Has high growth dividends only for a limited number of years. D) Has dividends that grow at a high rate for the life of the stock. E) Is valued using the preferred stock valuation technique. Ans: C

Level: Intermediate

Subject: Supernormal Growth

Type: Concepts

69. D1 in the dividend growth model is associated with which of the following words when solving for P 0? A) Next, expected, future B) Last, just paid, recent C) Just paid, expected, past D) Paid today, recent, current E) Expected, paid today, recent Ans: A

Level: Basic

Subject: Dividend Growth Model

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 13

Chapter 8 Stock Valuation

70. If the required rate of return used in the dividend growth model is increased, then: A) The dividend amount must also increase. B) The current value of the stock will decrease. C) P0 will increase. D) The supernormal model must be used to value the stock. E) The growth rate must also increase. Ans: B

Level: Intermediate

Subject: Dividend Growth Model

Type: Concepts

71. Which of the following rights are granted to shareholders of common stock? I. Election of corporate directors II. Selection of all senior management executives III. The option of voting by proxy IV. The right to share in any remaining assets in a liquidation A) I and III only B) II and IV only C) I, II, and III only D) I, III, and IV only E) I, II, III, and IV Ans: D

Level: Intermediate

Subject: Shareholder Rights

Type: Concepts

72. Which of the following statements concerning dividends is (are) correct? I. Dividends become a liability of the corporation at the time they are declared. II. The stockholders determine the amount of dividend to be paid. III. Dividends are a tax deductible expense. IV. Common stock dividends can be either cumulative or non-cumulative. A) I only B) II only. C) I and IV only D) II and IV only E) I and III only Ans: A

Level: Intermediate

Subject: Dividends

Type: Concepts

73. If the management of a corporation wants to raise equity capital while maintaining control over the corporation and limiting their cash outflows, they should issue shares of: A) Non-voting preferred stock. B) Voting preferred stock. C) Voting common stock. D) Non-voting common stock. E) Zero coupon bonds. Ans: D

Level: Intermediate

Subject: Classes Of Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 14

Chapter 8 Stock Valuation

74. Shareholders of convertible preferred stock generally have the: A) Right to convert their shares into bonds with an equivalent yield-to-maturity. B) Obligation to convert their shares into callable shares of common stock. C) Obligation to convert their shares into shares of common stock. D) Right to convert their shares into cash at par value at their discretion. E) Right to convert their shares into shares of common stock. Ans: E

Level: Intermediate

Subject: Convertible Preferred

Type: Concepts

75. Which one of the following statements is correct concerning the differences between preferred and common stock? A) Common shareholders have first right of priority after creditors in liquidation. B) Preferred shares carry voting rights while common shares do not. C) Common shareholders generally have more control over a corporation than preferred shareholders. D) Common dividends in arrearage must be paid prior to any additional preferred stock dividends. E) Common stock is a form of equity while preferred stock is a form of debt from a legal standpoint. Ans: C

Level: Intermediate

Subject: Preferred Versus Common Stock

Type: Concepts

76. It is easier for an outsider to gain control over a corporation when: A) Voting by proxy is not permitted. B) Management controls most of the common shares outstanding. C) Cumulative voting is used. D) Preferred shares are not convertible. E) Shareholders receive a consistently high rate of return. Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Concepts

77. There are three seats open on the board of directors of ABC, Inc. Ann owns voting shares of ABC common stock. If ABC uses cumulative voting, the maximum number of shares that Ann can vote for any one position is equal to: A) The number of open seats. B) One-third of the number of shares owned. C) The number of shares owned. D) Three times the number of shares owned multiplied by the number of open seats. E) The number of seats open times the number of shares owned. Ans: E

Level: Basic

Subject: Cumulative Voting

Type: Concepts

78. The dividend growth model assumes that: A) The rate of growth is constant. B) Next year's dividend is the same amount as last year's dividend. C) The rate of growth exceeds the required rate of return. D) The dividend amount used in the formula is the last dividend paid. E) The valuation is as of the year following the payment of the dividend used in the computation. Ans: A

Level: Intermediate

Subject: Dividend Growth Model

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Concepts

Page 15

Chapter 8 Stock Valuation

79. Deep Pockets Mining unexpectedly discovered an extremely rich vein of gold. Which of the following types of shareholders will benefit from the increased profits that will be generated from this find? I. Preferred shareholders II. Convertible preferred shareholders III. Non-voting common shareholders IV. Common shareholders A) IV only B) II and IV only C) I and II only D) I, II, and IV only E) II, III, and IV only Ans: E

Level: Intermediate

Subject: Common Stock

Type: Concepts

80. The capital gain yield: A) When subtracted from the dividend yield is equal to the required rate of return. B) Is the rate at which the price of the stock grows. C) Must always be a positive value. D) Is equal to the dividend amount divided by the current market price of the stock. E) Is the same as the current yield for shares of common stock. Ans: B

Level: Intermediate

Subject: Capital Gain Yield

Type: Concepts

81. Given constant earnings per share, an increase in dividends will generally: A) Increase the dividend yield as well as the capital gains yield. B) Decrease the growth rate of the corporation and increase the current yield. C) Increase the dividend yield and decrease the current yield. D) Have no effect on either the capital gains yield or the total return. E) Have no effect on either the total return or the current yield. Ans: B

Level: Challenge

Subject: Dividends And Growth

Type: Concepts

82. Which of the following statements is (are) correct concerning preferred stock? I. A missed dividend payment never has to be paid if the preferred stock is cumulative. II. All preferred stock has an obligatory sinking fund. III. Preferred stock has a stated liquidation value. IV. Preferred stock is never callable. A) III only B) IV only C) III and IV only D) II, III, and IV only E) I, II, and III only Ans: A

Level: Intermediate

Subject: Preferred Stock

Type: Concepts

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

83. What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 12%, and the stock is expected to be worth $110 one year from now? A) $95 B) $100 C) $110 D) $115 E) $120 Ans: B

Level: Basic

Subject: Stock Price

Type: Problems

84. The dividend on Simple Motors common stock will be $2 in one year, $3.50 in two years, and $5.00 in three years. You can sell the stock for $75 in three years. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock today? A) $59.69 B) $64.65 C) $64.82 D) $65.66 E) $71.30 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

85. A stock that pays a constant dividend of $2.50 forever currently sells for $20. What is the required rate of return? A) 11.0% B) 11.5% C) 12.0% D) 12.5% E) 13.0% Ans: D

Level: Basic

Subject: Zero Growth Stock Return

Type: Problems

86. Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indefinitely. Returns on the stock of firms like NoGro are currently running 15%. What is the value of one share of stock? A) $2.90 B) $13.65 C) $19.33 D) $31.25 E) $39.70 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

87. ABC Company's preferred stock is selling for $25 a share. If the required return is 12%, what will the dividend be two years from now? A) $2.39 B) $2.50 C) $3.00 D) $3.30 E) $3.76 Ans: C

Level: Basic

Subject: Preferred Stock Dividend

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 17

Chapter 8 Stock Valuation

88. The preferred stock of the Limbaugh Institute pays a constant annual dividend of $3 and sells for $20. You believe the stock will sell for $12 in one year. You must, therefore, believe that the required return on the stock will be ____ percentage points ___________ in one year. A) 8; higher B) 8; lower C) 9; higher D) 10; lower E) 10; higher Ans: E

Level: Basic

Subject: Preferred Stock Valuation

Type: Problems

89. What would you pay today for a stock that is expected to make a $1.50 dividend in one year if the expected dividend growth rate is 3% and you require a 16% return on your investment? A) $11.54 B) $12.33 C) $12.43 D) $13.14 E) $14.30 Ans: A

Level: Basic

Subject: Dividend Growth Model

Type: Problems

90. The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for one year from now? A) $127.06 B) $133.75 C) $143.11 D) $149.80 E) $152.78 Ans: C

Level: Basic

Subject: Stock Price

Type: Problems

91. Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 10%, what is the value of a share of Pale Hose? A) $14.00 B) $15.25 C) $25.80 D) $28.00 E) $29.40 Ans: E

Level: Basic

Subject: Dividend Growth Model

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

92. Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given a required return of 12%, the stock should today should sell for: A) $10.25 B) $12.50 C) $15.00 D) $16.25 E) $32.50 Ans: C

Level: Basic

Subject: Negative Dividend Growth Valuation

Type: Problems

93. Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of $2.50; given a required return is 12%, the price of the stock in two years will be: A) $9.45 B) $11.52 C) $13.82 D) $14.98 E) $29.95 Ans: C

Level: Basic

Subject: Negative Dividend Growth Valuation

Type: Problems

94. Llano's stock is currently selling for $50. The expected dividend one year from now is $1.50 and the required return is 10%. What is this firm's dividend growth rate assuming the constant dividend growth model is appropriate? A) 7% B) 8% C) 9% D) 10% E) None of the above. Ans: A

Level: Basic

Subject: Dividend Growth Rate

Type: Problems

95. The current price of XYZ stock is $50. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the required rate of return on XYZ stock? A) 9.0% B) 9.1% C) 9.3% D) 10.6% E) 11.2% Ans: B

Level: Basic

Subject: Required Returns

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 19

Chapter 8 Stock Valuation

96. ABC Corporation's common stock dividend yield is 2.1%, it just paid a dividend of $1, and is expected to pay a dividend of $1.07 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock? A) 9.0% B) 9.1% C) 9.3% D) 10.6% E) 11.2% Ans: B

Level: Basic

Subject: Required Returns

Type: Problems

97. Suppose that you have just purchased a share of stock for $22.50. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock? A) 5.00% B) 7.00% C) 10.25% D) 12.00% E) 13.67% Ans: D

Level: Basic

Subject: Required Returns

Type: Problems

98. Killnum Corp. announces that the dividend for the next year will be $2.50 per share rather than the originally expected $1.50 per share. From then on, it is expected that dividends will resume their historical constant growth rate of 5% per year. What would you expect to happen to the price of the stock? Ignore any tax effects. A) The price will likely double. B) The price will likely rise by less than 100%. C) The price will likely rise by exactly 50%. D) The price will remain unchanged. E) The price will likely rise by the present value of $1. Ans: B

Level: Basic

Subject: Dividend Growth Model

Type: Problems

99. McGonigal's Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends in three years. The first dividend will be $1 and dividends are expected to grow at 5% thereafter. Given a required return of 15%, what would you pay for the stock today? A) $7.18 B) $7.56 C) $8.29 D) $10.00 E) $10.50 Ans: B

Level: Basic

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 20

Chapter 8 Stock Valuation

100. McIntyre's Moats, Inc. currently pays no dividends, but the firm will begin paying dividends in three years. The first dividend will be $2.50 and dividends are expected to grow at 2% thereafter. Given a current market price of $55.62, what is the required return on the stock? A) 4% B) 5% C) 6% D) 7% E) 8% Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

101. McIver's Meals, Inc. currently pays a $1 annual dividend. Investors believe that dividends will grow at 15% next year, 10% annually for the two years after that, and 5% annually thereafter. Assume the required return is 10%. What is the current market price of the stock? A) $21.77 B) $22.99 C) $25.09 D) $26.13 E) $27.65 Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

102. Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will not subsequently change. Given a required return of 15%, what should the stock sell for today? A) $1.21 B) $2.15 C) $8.15 D) $42.00 E) $80.00 Ans: A

Level: Basic

Subject: Nonconstant Dividend Growth

Type: Problems

103. Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate annually thereafter. Given a required return of 15%, what should the stock should sell for today? A) $1.21 B) $1.64 C) $2.01 D) $4.39 E) $13.45 Ans: C

Level: Basic

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 21

Chapter 8 Stock Valuation

104. Suppose the Pale Hose Corp. is expected to pay a dividend next year of $1.75 per share. Both sales and profits for Pale Hose are expected to grow at a rate of 15% for the following two years and then at 2% per year thereafter indefinitely. Dividend growth is expected to match sales growth. If the required return is 14%, what is the value of a share of Pale Hose? A) $16.49 B) $16.98 C) $17.92 D) $18.49 E) $19.76 Ans: C

Level: Basic

Subject: Supernormal Growth

Type: Problems

105. Energistics, Inc. plans to retain and reinvest all of their earnings for the next three years; at the end of year 3 the firm will pay a special dividend of $5 per share. Beginning in year 4, the firm will begin to pay a dividend of $1 per share, which is expected to grow at a 3% rate annually forever. Given a required return of 12%, the stock should sell for _____ today. A) $11.47 B) $12.44 C) $13.15 D) $14.27 E) $15.01 Ans: A

Level: Basic

Subject: Stock Valuation

Type: Problems

106. Moore Money Inc. just paid a dividend of $2. The required return on the stock is 15%. If it has the following expected dividend growth rates what should the stock sell for? Year Growth 1&2 15% 3 12% 4+ 6% A) B) C) D) E)

$22.45 $26.17 $27.79 $28.89 $29.68

Ans: D

Level: Basic

Subject: Supernormal Growth

Type: Problems

107. Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 4%. At the end of year 5, Oly will issue its first dividend in the amount of $2 per share. If the required return is 16%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4. A) $7.49 B) $7.67 C) $8.17 D) $9.20 E) $9.91 Ans: D

Level: Intermediate

Subject: Nonconstant Dividend Growth

Copyright © 2005 McGraw-Hill Ryerson Limited.

Type: Problems

Page 22

Chapter 8 Stock Valuation

108. Etling Inc.'s dividend is expected to grow at 6% for the next two years and then at 3% forever. If the current dividend is $3 and the required return is 16%, what is the price of the stock? A) $25.10 B) $25.82 C) $26.15 D) $27.58 E) $29.45 Ans: A

Level: Basic

Subject: Supernormal Growth

Type: Problems

109. CBC stock is expected to sell for $22 two years from now. Supernormal growth of 5% is expected for the next two years. The current dividend is $1 and the required return is 15%. What constant growth rate is expected beginning in year 3? A) 6.5% B) 6.7% C) 8.1% D) 8.4% E) 9.5% Ans: E

Level: Intermediate

Subject: Supernormal Growth Valuation

Type: Problems

110. If Russian Motors closed at $22 and the current quarterly dividend is $1.25, what % yield would be reported in The National Post? A) 5.7% B) 6.5% C) 9.1% D) 22.2% E) 22.7% Ans: E

Level: Intermediate

Subject: Percent Yield

Type: Problems

111. A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What is the dividend the firm is expected to pay in one year if the current stock price is $40? A) $2.00 B) $2.40 C) $2.80 D) $3.20 E) $3.60 Ans: B

Level: Basic

Subject: Dividend Yield

Type: Problems

112. A firm's stock has a required return of 10%. The stock's dividend yield is 6%. What dividend did the firm just pay if the current stock price is $40? A) $2.18 B) $2.31 C) $2.50 D) $2.87 E) $3.60 Ans: B

Level: Basic

Subject: Dividend Yield

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

113. Saskatchewan Steel, Ltd. and Alberta Copper, Inc. both recently announced earnings of $400,000. Both companies have common shares outstanding of 250,000 and rates of return of 10%. Saskatchewan Steel has a new project that will generate net cash flows of $50,000 per year forever. Alberta Copper has a new project that will generate net cash flows of $40,000 per year forever. The stock price of Saskatchewan Steel should be _______ greater than the stock price of Alberta Steel. A) $0.04 B) $0.40 C) $3.60 D) $10,000 E) $100,000 Ans: B

Level: Intermediate

Subject: Growth Opportunities

Type: Problems

114. There is an election being held to fill two seats on the board of directors of a firm in which you hold stock. There are a total of 420 shares outstanding. If the election is conducted under cumulative voting and you own 120 shares, how many more shares must you buy to be assured of earning a seat on the board? A) 0 B) 20 C) 21 D) 91 E) 141 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

115. Four directors will be elected and you wish to be one of them. With cumulative voting, what percentage of the shares (plus one) do you need to have on your side to guarantee you a seat? A) 12.5% B) 16.7% C) 20.0% D) 25.0% E) 33.3% Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

116. A firm has 200,000 shares outstanding. If three directors will be elected, how many shares do you need to control to assure yourself a seat on the board under cumulative voting procedures? A) 30,001 B) 40,001 C) 50,001 D) 66,668 E) 100,001 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

117. Suppose you own 500 shares of Biogen common stock. Two directors are to be elected. Since the firm uses cumulative voting, you can cast as many as _____________ votes for a single director. A) 100 B) 250 C) 500 D) 750 E) 1,000 Ans: E

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

118. Your firm is converting from cumulative voting to straight voting. You currently own the minimum number of shares needed to assure yourself a seat on the board in any election under cumulative voting. How many more shares must you purchase in order to assure yourself a seat under straight voting? Assume there are a total of 500,000 shares outstanding and that three directors go up for election at a time. A) 0 B) 25,000 C) 125,000 D) 250,000 E) 250,001 Ans: C

Level: Intermediate

Subject: Straight Voting

Type: Problems

Use the following to answer questions 119-126:

Hi 126.25

52 Weeks Lo 72.50

Yld Stock Big Hat

Sym BH

Di v 1.30

%

PE

1.32

16

Vol 100s

20925 98.38

119. Big Hat must have closed at _________ per share on the previous trading day. A) $97.38 B) $98.26 C) $99.88 D) $98.13 E) $98.50 Ans: B

Level: Basic

Subject: Common Stock Quote

Type: Problems

120. For the current year, the expected dividend per share is: A) $1.10 B) $1.30 C) $1.32 D) $2.10 E) $4.40 Ans: B

Level: Basic

Subject: Dividend Per Share

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Hi

Page 25

Lo

Close

Chg.

97.88

98.13

-.13

Chapter 8 Stock Valuation

121. Assume the expected growth rate in dividends is 7%. Then the constant growth model suggests that the required return on Big Hat stock is: A) 7.4% B) 7.9% C) 8.0% D) 8.4% E) 9.8% Ans: D

Level: Basic

Subject: Required Returns

Type: Problems

122. Based on the quote, a good estimate of EPS over the last four quarters is: A) $0.16 B) $3.29 C) $6.13 D) $8.45 E) $9.76 Ans: C

Level: Basic

Subject: Earnings Per Share

Type: Problems

123. On this trading day, the number of Big Hat shares which changed hands was: A) 209 B) 2,092 C) 20,925 D) 209,250 E) 2,092,500 Ans: E

Level: Basic

Subject: Trading Volume

Type: Problems

124. Assume that Big Hat paid a $1.12 annual dividend in the previous period. What is the dividend growth rate based on this quote? A) 1.16% B) 12.20% C) 14.15% D) 16.07% E) 16.29% Ans: D

Level: Basic

Subject: Dividend Growth Rate

Type: Problems

125. You believe that the required return on Big Hat stock is 12% and that the expected dividend growth rate is 10%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced? A) Overvalued B) Undervalued C) Fairly priced D) Cannot tell without more information Ans: A

Level: Intermediate

Subject: Stock Valuation

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

Page 26

Chapter 8 Stock Valuation

126. Assume that Big Hat is selling at its equilibrium price. Also assume that dividends are expected to grow at a constant rate of 25% for the foreseeable future. What is the required return on the stock? A) 18.5% B) 22.7% C) 24.1% D) 24.7% E) 26.7% Ans: E

Level: Intermediate

Subject: Required Returns

Type: Problems

Use the following to answer questions 127-130: Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%. 127. The price of Bradley Broadcasting stock today should be A) $18.48 B) $19.12 C) $20.33 D) $21.46 E) $22.56 Ans: C

Level: Basic

Subject: Stock Valuation

Type: Problems

128. What is growth rate of the Bradley Broadcasting dividend during year 2? A) 10% B) 15% C) 20% D) 25% E) 50% Ans: A

Level: Basic

Subject: Stock Valuation

Type: Problems

129. How much is Bradley's stock price expected to increase during the first year? A) 1.05% B) 4.59% C) 5.15% D) 6.24% E) 6.51% Ans: B

Level: Intermediate

Subject: Stock Valuation

Type: Problems

130. What is expected capital gains yield on Bradley Broadcasting stock during year 8? A) 3% B) 4% C) 9% D) 10% E) 14% Ans: B

Level: Intermediate

Subject: Stock Valuation

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

131. The Johnson Company just paid an annual dividend of $1.60. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a 9% rate of return? A) $14.40 B) $16.33 C) $17.78 D) $18.21 E) $19.38 Ans: C

Level: Basic

Subject: Stock Value

Type: Problems

132. Alhandro, Inc. just paid an annual dividend of $1.03. They have been increasing their dividends by 4% annually and are expected to continue doing so. How much can they expect to receive for each new share of stock offered if investors require an 11% rate of return? A) $9.36 B) $9.74 C) $14.71 D) $15.30 E) $15.91 Ans: D

Level: Intermediate

Subject: Stock Value

Type: Problems

133. The KLS Co. is expected to pay the following annual dividends for the next three years: $1.00, $1.50, and $1.60, respectively. After that time, they are expected to increase their dividends by 3% annually. Stocks similar to KLS are yielding 9.5%. What is one share of KLS worth today? A) $22.69 B) $23.87 C) $27.05 D) $27.30 E) $29.20 Ans: A

Level: Intermediate

Subject: Value Of Non-Constant Dividend

Type: Problems

134. The Brown Company just announced that they will be increasing their annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay for one share of the Brown Company stock if you require a 12% rate of return? A) $14.35 B) $14.63 C) $17.68 D) $18.13 E) $19.81 Ans: C

Level: Intermediate

Subject: Stock Value

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

135. The MIKO Corp. paid $0.84 in dividends last year. They have just announced that they expect to increase their dividends by 2% each year for the foreseeable future. Currently, MIKO stock is priced at $21.32 per share. What is the rate of return on MIKO stock? A) 4.01% B) 4.96% C) 5.86% D) 5.94% E) 6.02% Ans: E

Level: Intermediate

Subject: Required Return

Type: Problems

136. Swanson Brothers expects to pay a $2.20 dividend next year which is an increase of 3.25% over the prior year. After next year, dividends are projected to grow at a steady rate of 2.5%. Shares of Swanson stock are currently selling at $15.80 per share. What is the rate of return on Swanson stock? A) 14.27% B) 16.42% C) 16.77% D) 17.17% E) 23.66% Ans: B

Level: Intermediate

Subject: Required Return

Type: Problems

137. Shares of Blue Dye, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Blue Dye have been increasing at a rate of 2.4% and are expected to continue at this rate. What is the expected amount of the next dividend? A) $1.37 B) $1.91 C) $2.41 D) $2.87 E) $2.93 Ans: E

Level: Intermediate

Subject: Dividend Amount

Type: Problems

138. Morris, Inc. has some 8% preferred stock outstanding. How much are you willing to pay for one share of Morris preferred stock if you require a 7% rate of return? A) $87.50 B) $98.11 C) $114.29 D) $123.87 E) $125.14 Ans: C

Level: Basic

Subject: Dividend Amount

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

139. Noshima Industries issued dividends totaling $0.60 last year. For the next two years, they expect dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Noshima Industries stock worth today if you require a 9% rate of return? A) $13.45 B) $13.77 C) $14.59 D) $15.00 E) $15.14 Ans: C

Level: Intermediate

Subject: Nonconstant Dividend

Type: Problems

140. MDK, Inc. is a high growth firm that has never paid a dividend. The company just issued a press release stating that next year they plan on paying an annual dividend of $0.34. They also stated that dividends are expected to increase by 40% a year for each of the following four years and then increase by 4% annually thereafter. The required rate of return on this stock is 15%. What is the expected price per share of MDK stock six years from now? A) $9.12 B) $9.42 C) $12.35 D) $12.84 E) $14.14 Ans: D

Level: Challenge

Subject: Nonconstant Dividend

Type: Problems

141. Mahenterin Inc. is expecting to pay $1.23, $0.99, and $1.13 in annual dividends for the next three years respectively. After that, they project that dividends will increase by 1.5% annually. Andy is in the 25% marginal tax bracket and wants to earn 6% after-tax on his investments. How much is Andy willing to pay today for one share of Mahenterin Inc. stock? A) $16.90 B) $17.04 C) $17.31 D) $17.36 E) $17.81 Ans: A

Level: Challenge

Subject: Nonconstant Dividend

Type: Problems

142. Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michaels wishes to sell some new preferred stock at par, what rate should they assign to the new shares? A) 6.76% B) 7.24% C) 8.05% D) 9.00% E) 11.19% Ans: B

Level: Intermediate

Subject: Preferred Stock Value

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

143. Jamie just paid $8,239 for 100 shares of 6% preferred stock. What rate of return will she earn? A) 4.94% B) 7.28% C) 8.24% D) 10.94% E) 713.73% Ans: B

Level: Intermediate

Subject: Preferred Stock Rate Of Return

Type: Problems

144. The daily newspaper lists this information on a stock: Last $36.19, Net Chg -1.63 and Yld % 1.3. What is the amount of the current dividend? A) $0.44 B) $0.45 C) $0.47 D) $0.49 E) $0.52 Ans: C

Level: Intermediate

Subject: Stock Quote

Type: Problems

145. ABC, Inc. has earnings per share of $1.44. The newspaper shows a P/E of 23 and a dividend of $1.39 for shares of ABC, Inc stock. What is the dividend yield? A) 3.6% B) 3.8% C) 3.9% D) 4.2% E) 4.3% Ans: D

Level: Intermediate

Subject: Stock Quote

Type: Problems

146. Leon purchased 1,000 shares of LJK stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Leon's required rate of return is 13% on this type of investment. What is the capital gains yield on LJK stock? A) 7.41% B) 8.72% C) 9.06% D) 13.85% E) 16.94% Ans: B

Level: Intermediate

Subject: Growth Rate

Type: Problems

147. ABC stock closed yesterday at a price of $39.80 a share. The price today was down $2.10. ABC pays a $0.48 annual dividend which has remained constant for five years. What is the current dividend yield today? A) 1.15% B) 1.21% C) 1.27% D) 1.31% E) 1.33% Ans: C

Level: Intermediate

Subject: Dividend Yield

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

148. An 8% preferred stock closed yesterday at a price of $91.32. The stock closed today at par. What is the current dividend yield? A) 7.31% B) 7.50% C) 8.00% D) 8.76% E) 8.80% Ans: C

Level: Basic

Subject: Dividend Yield

Type: Problems

149. Marcy owns 100 shares of Dee's Inc. while Teri owns 300 shares and Lucie owns 500 shares. There are currently three seats open on the board of directors. With straight voting, how many additional shares will Marcy have to buy from Terri or Lucie to guarantee that she will be elected to the board? A) 0 B) 1 C) 151 D) 201 E) 351 Ans: E

Level: Intermediate

Subject: Straight Voting

Type: Problems

150. There are 5 seats open on the board of directors of Alpha, Inc. Jason wants to be positive that he can be elected to one of these positions. Alpha uses straight voting. There are 1,500 shares of Alpha stock outstanding. Twenty percent of the shares are owned by Midge, 30% are owned by Peter, 10% are owned by Jeff, 25% are owned by Jason and the rest are owned by Edward. How many additional shares of stock must Jason buy to ensure that he wins a seat? A) 0 B) 251 C) 298 D) 376 E) 411 Ans: D

Level: Intermediate

Subject: Straight Voting

Type: Problems

151. Marcy owns 100 shares of Dee's Inc. while Teri owns 300 shares and Lucie owns 500 shares. There are currently three seats open on the board of directors. With cumulative voting, how many additional shares will Marcy have to buy from Teri or Lucie to guarantee that she will be elected to the board? A) 0 B) 63 C) 126 D) 256 E) 351 Ans: C

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

152. There are 5 seats open on the board of directors of Alpha, Inc. Jason wants to be positive that he can be elected to one of these positions. Alpha uses cumulative voting. There are 1,500 shares of Alpha stock outstanding. Twenty percent of the shares are owned by Midge, 30% are owned by Peter, 10% are owned by Jeff, 25% are owned by Jason and the rest are owned by Edward. How many additional shares of stock must Jason buy to ensure that he wins a seat? A) 0 B) 56 C) 116 D) 251 E) 376 Ans: A

Level: Intermediate

Subject: Cumulative Voting

Type: Problems

153. Jackson Supply has 2,500 shares of stock outstanding. There are three positions open on the board of directors. Amy wants to be elected to one of those positions. How many more shares must Amy own to guarantee her election if Jackson Supply uses straight voting as opposed to cumulative voting? A) 625 B) 626 C) 834 D) 1250 E) 1251 Ans: A

Level: Intermediate

Subject: Straight Versus Cumulative Voting

Type: Problems

154. The Battery Co. paid $1.20 in dividends last year. Margaret paid a price of $15.00 a share for Battery Co. stock and has an expected return of 8% on this investment. What is the growth rate of the Battery Co. stock? A) 0% B) 4% C) 8% D) 12% E) 16% Ans: A

Level: Intermediate

Subject: Zero Growth Stock

Type: Problems

155. List and briefly explain the three special cases in which we can come up with a value for a share of stock. Ans: The three cases are: zero growth, constant growth, and cases where the dividend grows at a constant rate after some length of time. The zero growth case is a simple perpetuity, the constant growth case is a straightforward application of the dividend growth model, and the third case requires using the nonconstant dividend growth model. Level: Basic

Subject: Stock Valuation

Type: Essays

156. Consider a share of stock that pays a dividend of $1 at the end of one year, $2 at the end of two years, and then dividends grow at a constant rate of 5% per year thereafter. If the required return is 10%, we can value this share of stock by finding P2 using D3, then find P0 = D1/1. 1 + D2/1. 12 + P2/1. 12. In this formula, it appears as though we ignore all dividends from year three on. Why is this so? Ans: We actually don't ignore any dividends. When we compute P2 we incorporate dividend number three, but also all dividends from that point forward) Thus, we have included all dividends in the stock valuation, which is required in order to determine the value of a share. Level: Basic

Subject: Nonconstant Dividend Growth

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

157. What are the components of the required rate of return on a share of stock? Briefly explain each. Ans: The two components are dividend yield, which measures the annual percentage income return on the stock, and the capital gains yield, which is the percentage price appreciation (or depreciation) of the stock. Level: Basic

Subject: Required Returns

Type: Essays

158. Briefly explain the differences between preferred and common stock. Ans: Common stockholders have the right to vote on corporate matters and have the right to receive the residual value of the firm after all liabilities and preferred stockholders are paid in a liquidation. Preferred stockholders have a promised dividend, may or may not have the right to collect dividends that have been passed, and preferred stock will typically be rated much like bonds. In a liquidation, preferred shareholders have a preference over common stockholders. Level: Basic

Subject: Preferred vs. Common Stock

Type: Essays

159. Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why. Ans: Bonds, unlike stocks, have a final maturity date and promised payments at fixed periods of time. For stocks, the only valuation model we have up to this point in the text is the dividend growth model which requires estimation of a dividend growth rate and also requires that certain conditions be met before the dividend growth model can be applied. Normally, all of the information required to find the yield on a publicly traded bond is publicly available while only the price and most current dividend are available for stocks. Level: Basic

Subject: Stocks vs. Bonds

Type: Essays

160. A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain. Ans: Our basic principle of stock valuation is that the value of a share of stock is simply equal to the present value of all of the expected dividends on the stock. According to the dividend growth model, an asset that has no expected cash flows has a value of zero, so if investors are willing to purchase shares of stock in firms that pay no dividends, they evidently expect that the firms will begin paying dividends at some point in the future. Level: Intermediate

Subject: Zero-Dividend Stocks

Type: Essays

161. A firm has two classes of common stock outstanding:Class A, which carries voting rights of 10 votes per share but receives no dividends (ever), and Class B, which carries voting rights of one vote per share and pays dividends whenever they are declared by the board. Which would you be willing to pay more for and why? Ans: This is a very open-ended question to get the students thinking about the differing interests of investors. Management of the firm would likely prefer Class A while investors interested in dividends would likely prefer Class B shares. The Class B shares with their ordinary voting rights and dividends can be valued using the dividend growth model but the Class A shares, whose value is derived completely from the voting rights, would be very difficult to value. Level: Challenge

Subject: Classes Of Stock

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

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Chapter 8 Stock Valuation

162. A firm has common and preferred stock outstanding, both of which just paid a dividend of $3 per share)Which do you think will have a higher share price and why? If the firm also has an issue of noncallable debentures outstanding, which do you think investors will require a higher return on, the debentures or the shares of common stock? Explain. Ans: This question sets up some of the material addressed later in the chapter. First, the share of common stock will be worth more since dividends will typically be expected to increase while they will not on the preferred shares. The investor-required return will be higher for the stock since bonds have promised payments and preference over stock in liquidation. The astute student will make the connection that bondholder returns are effectively limited while stockholder returns are effectively not. Level: Challenge

Subject: Required Returns

Type: Essays

163. Explain how supernormal growth of dividends is possible, but only in the short-term. Ans: Supernormal growth is often associated with young, rapidly growing firms which have not previously paid a dividend. When these firms begin to pay dividends, the amount is often small. Therefore, it only requires a small increase in the dividend amount to equate to a large increase in percentage terms. As the dividend amount increases, the same percentage increase would cost significantly more in dollar terms. For example, a $0.05 increase to a $0.10 dividend is a 50% increase. For a $2.00 dividend to increase by 50%, the dividend amount would have to rise by $1.00. It is a lot easier to afford a $0.05 increase than a $1.00 increase. Thus, firms can not afford too many years of supernormal growth. Level: Intermediate

Subject: Supernormal Growth

Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited.

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