- 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.
Answer: B
- 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.
Answer: C
- 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.
Answer: D
- 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)
- D)
- E) Infused equity.
Answer: C
- The market in which new securities are originally sold to investors is the ________ market.
- A) dealer
- B) auction
- C) over-the-counter (OTC)
- D) secondary
- E) primary
Answer: E
- The market in which previously issued securities are traded among investors is the:
- A) Dealer market.
- B) Auction market.
- C) Over-the-counter (OTC) market.
- D) Secondary market.
- E) Primary market.
Answer: D
- Common stock valuation requires, among other things, information regarding the:
- Expected dividend growth rate.
- Current dividend payment.
III. Par value of the common stock.
- A) I only
- B) I and II only
- C) I and III only
- D) II and III only
- E) I, II, and III
Answer: B
- 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
Answer: E
- Which of the following items would usually appear for a stock quote in The Wall Street Journal?
- A) Capital gains rate
- B) Dividend yield
- C) Number of shares outstanding
- D) Par value of the stock
- E) Dividend growth rate
Answer: B
- If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ___________.
- the price of the stock today
- the dividend that is expected to be paid ten years from now
III. the appropriate discount rate ten 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
Answer: B
- Which of the following statements regarding dividend yields is true?
- A) It measures how much the stock’s price will increase in a year.
- B) It incorporates the par value of the stock into the calculation.
- C) It is analogous to the current yield for a bond.
- D) It is always greater than the stock’s capital gains yield.
- E) It measures the total annual return an investor can expect to earn by owning the stock.
Answer: C
- Which of the following is (are) true?
- The dividend yield on a stock is the annual dividend divided by the par value.
- 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
Answer: D
- If some shareholders have greater voting power than others, it must be that:
- A) The company has both preferred stock and common stock outstanding.
- B) The company has outstanding debentures.
- C) The company is located outside the United States in a tax-haven locale.
- D) The company has multiple classes of common stock.
- E) The company is in bankruptcy proceedings.
Answer: D
- What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per share, your required return on equity investments is 15%, and the stock is expected to be worth $90 one year from now?
- A) $78.26
- B) $80.87
- C) $82.56
- D) $90.00
- E) $98.12
Answer: B
Response: P0 = $3 / 1.15 + 90 / 1.15 = $80.87
- The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today?
- A) $75.45
- B) $77.24
- C) $81.52
- D) $85.66
- E) $91.30
Answer: C
Response: P0 = $3.00 / 1.12 + 4.25 / 1.122 + 106 / 1.123 = $81.52
- A stock that pays a constant dividend of $1.50 forever currently sells for $10.71. What is the required rate of return?
- A) 10%
- B) 12%
- C) 13%
- D) 14%
- E) 15%
Answer: D
Response: $10.71 = $1.50 / R; R = 14%
- ABC Company’s preferred stock is selling for $30 a share. If the required return is 8%, what will the dividend be two years from now?
- A) $2.00
- B) $2.20
- C) $2.40
- D) $2.80
- E) $3.25
Answer: C
Response: $30 = D / .08; D = $2.40
- What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% and you require a 12% return on your investment?
- A) $28.57
- B) $29.33
- C) $31.43
- D) $43.14
- E) $54.30
Answer: A
Response: P0 = $2 / (.12 – .05) = $28.57
- The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?
- A) $ 00
- B) $ 52
- C) $ 40
- D) $ 80
- E) $112.78
Answer: C
Response: P1 = P0(1 + g) = $90 (1.06) = $95.40
- Llano’s stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm’s dividend growth rate assuming the constant dividend growth model is appropriate?
- A) 8%
- B) 9%
- C) 10%
- D) 11%
Answer: A
Response: g = .13 – ($2 / 40) = 8%
- The current price of XYZ stock is $80.00. Dividends are expected to grow at 5% indefinitely and the most recent dividend was $2.75. What is the required rate of return on XYZ stock?
- A) 3%
- B) 7%
- C) 5%
- D) 6%
- E) 2%
Answer: B
Response: R = ($2.89 / 80) + .05 = 8.7%
- ABC Corporation’s common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 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) 3%
- B) 7%
- C) 5%
- D) 6%
- E) 2%
Answer: B
Response: ($2.89 – 2.75) / 2.75 = .051; R = .036 + .051 = 8.7%
- If Big Amp, Inc. stock closed at $36 and the current quarterly dividend is $0.75 per share, what dividend yield would be reported for the stock in The Wall Street Journal?
- A) 0%
- B) 6%
- C) 7%
- D) 6%
- E) 3%
Answer: E
Response: DY = ($0.75 x 4) / 36 = 8.3%
- Suppose NoGro, Inc. has just issued a dividend of $3.25 per share. Subsequent dividends will remain at $3.25 indefinitely. Returns on the stock of firms like NoGro are currently running 10%. What is the value of one share of stock?
- A) $22.50
- B) $27.25
- C) $32.50
- D) $37.25
- E) $39.75
Answer: C
Response: P0 = $3.25 / .10 = $32.50
- Suppose Pale Hose, Inc. has just paid a dividend of $1.80 per share. Sales and profits for Pale Hose are expected to grow at a rate of 8% per year. Its dividend is expected to grow by the same amount. If the required return is 14%, what is the value of a share of Pale Hose?
- A) $18.00
- B) $25.20
- C) $27.80
- D) $30.60
- E) $32.40
Answer: E
Response: P0 = [$1.80(1.08)] / (.14 – .08) = $32.40
- Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?
- A) 45%
- B) 00%
- C) 25%
- D) 35%
- E) 65%
Answer: D
Response: R = [$2(1.07)] / 40 + – .07 = 12.35%
- The preferred stock of the Limbaugh Institute pays a constant annual dividend of $4 and sells for $50. You believe the stock will sell for $32 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) 5; higher
- D) 5; lower
- E) 5; higher
Answer: E
Response: current: $50 = $4 / R; R = 8%; future: $32 = $4 / R; R = 12.5
- A firm’s stock has a required return of 12%. The stock’s dividend yield is 5%. What is the dividend the firm is expected to pay in one year if the current stock price is $50?
- A) $2.00
- B) $2.50
- C) $3.00
- D) $3.50
- E) $4.00
Answer: B
Response: D1 = $50 (.05) = $2.50
- A firm’s stock has a required return of 12%. The stock’s dividend yield is 5%. What dividend did the firm just pay if the current stock price is $50?
- A) $2.18
- B) $2.34
- C) $2.50
- D) $2.87
- E) $3.60
Answer: B
Use the following to answer questions 30-36:
- Duke stock must have closed at ___________ per share on the previous trading day.
- A) $29.64
- B) $30.76
- C) $30.99
- D) $31.55
- E) $32.11
Answer: B
Response: 30.76 – 0.56 = 30.20
- For the current year, the expected dividend per share is:
- A) $0.25
- B) $1.00
- C) $2.00
- D) $3.30
- E) $4.00
Answer: B
Doing the algebra? Expected DPS = Yld x Close = .033 x 30.20 = 1
- Assume the expected growth rate in dividends is 10%. Then the constant growth model suggests that the required return on Duke stock is:
- A) 4%
- B) 9%
- C) 0%
- D) 6%
- E) 8%
Answer: D
Response: R = [($1.00 x 1.10) / 30.20] + .10 = 13.6%
- Based on the quote, a good estimate of EPS over the last four quarters is:
- A) $0.80
- B) $1.21
- C) $1.68
- D) $1.91
- E) $2.54
Answer: C
Response: EPS = $30.20 / 18 = $1.68
- On this trading day, the number of Duke shares which changed hands was:
- A) 209
- B) 2,092
- C) 20,925
- D) 209,250
- E) 2,092,500
Answer: E
The algebra? How about 20,925 x 100 = 2,092,500
- Assume that Duke paid a $0.92 annual dividend in the previous period. What is the dividend growth rate based on this quote?
- A) 8%
- B) 0%
- C) 2%
- D) 7%
- E) 9%
Answer: D : Response: g = ($1.00 / 0.92) – 1 = 8.7%
- You believe that the required return on Duke stock is 16% and that the expected dividend growth rate is 12%, 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
Answer: A
Response: P0 = [$1.00 (1.12) ] / (.16 – .12) = $28.00; overvalued at $30.20 in the market
