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Exam 8: Stock Valuation

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Question 61

Multiple Choice

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Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

A) must always show a current liability of $2,400 for dividends payable.
B) must still declare each dividend before it becomes an actual company liability.
C) is obligated to pay $2.40 per share each year in perpetuity.
D) will be declared in default if it does not pay at least $2.40 per share per year on a timely basis.
E) incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment.

F) A) and B)
G) C) and D)

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Question 62

Multiple Choice

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The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

A) pay an increasing dividend for a period of time and then cease paying dividends altogether.
B) increase the dividend amount every other year.
C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year.
D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
E) pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

F) C) and E)
G) C) and D)

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Question 63

Multiple Choice

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Hot Teas common stock is currently selling for $38.97. The last annual dividend paid was $1.26 per share and the market rate of return is 13.2 percent. At what rate is the dividend growing?

Home Parties is paying an annual dividend of $1.78 every other year. The last dividend was paid last year. The firm will continue this policy until two more dividend payments have been paid. Three years after the last normal dividend payment, the company plans to pay a final liquidating dividend of $32 per share. What is the current market value of this stock if the required return is 14.7 percent?

The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?

The UpTowner just paid an annual dividend of $4.12. The company has a policy of increasing the dividend by 2.5 percent annually. You would like to purchase shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a rate of return of 16.7 percent, how much will you be willing to pay per share when you can afford to make this investment?

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.52, $1.58, and $1.60 a share over the next three years, respectively. After that, the dividend will be constant at $1.65 per share per year. What is the market price of this stock if the market rate of return is 12 percent?

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent?

Future Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

Currently, a firm has a benchmark PE of 11.7 and an EPS of $3.20. Earnings are expected to grow 3.2 percent annually. What is the implicit rate of return?

The dividend growth model:

Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

The average time for a trade on the NYSE Arca is best defined as less than:

Galloway, Inc., just paid a dividend of $3 per share and has announced that it will increase its dividend by $1 per share for each of the next 4 years, and then never pay another dividend. What is the current per share value at a required return of 12.7 percent?