8 Edit Finance corporate finance

8/15/2019 8 Edit Finance corporate finance

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2., An asset characterized by cash flows that increase at a constant rate forever is called a:

A. , Growing perpetuity.

3., The stoc valuation !odel that deter!ines the current stoc price as the ne"t dividend divided by the #discount rate less the dividend growth rate$ is called the:

B. , %ividend growth !odel.

&., A stoc's ne"t e"pected dividend divided by the current stoc price is the:C. , %ividend yield.

(., The rate at which the stoc price is e"pected to appreciate #or depreciate$ is the:

D. , )apital gains yield.

*., +uity without priority for dividends or in the event of banruptcy is calledE. , )o!!on stoc.

-., The ter! is usually applied to stoc that has no special preference either in paying dividends or in banruptcy.

C. , co!!on stoc

/., 0ree!ptive rights0 refers to:

B. , The right of shareholders to share proportionately in any new stoc issues sold.

., ay!ents !ade by a corporation to its shareholders, in the for! of either cash, stoc, or pay!ents in ind, are called:

C. , %ividends.

2., +uity with differential voting rights and4or dividend pay!ent clai!s is called:A. , %ual class stoc.

21., +uity with priority for dividends and in the event of banruptcy is called:

D. , referred stoc.

22., The short alphabetic abbreviation for an e"change5listed stoc by which the issue is identified in the !aret is called the stoc's .



D. , Ticer sy!bol.

23., The voting procedure where shareholders !ay cast all of their votes for one !e!ber of the board is:

B. , )u!ulative voting.

2&., The voting procedure where shareholders !ay cast all of their votes for each !e!ber of the board is:

C. , 6traight voting.

2(., The voting procedure where shareholders grant authority to another individual to vote their shares is called:

E. , ro"y voting.

2*., A stoc whose price can be co!puted by dividing the annual dividend a!ount by the reuired rate of return is called a growth stoc.

C. , 7ero.

2-., referred stoc is a type of growth stoc.

B. , 7ero.

2/., Given a price at year (, the dividend in the dividend growth !odel would be defined as:E. , The annual dividend in year *.

2., The capital gains yield as used in the dividend growth !odel is defined as:

D. , g.

3., The procedure which has the effect of per!itting !inority participation in voting is called voting.

B. , )u!ulative.

31., A cu!ulative dividend is defined as a dividend that is:A. , )arried forward as an arrearage if not paid.

32., 8hich of the following is true of non5voting co!!on stoc9D. , on5voting shares !ust receive dividends no lower than dividends on voting shares.

33., The reuired return is defined as:

A. , The capital gains yield plus the dividend yield.

3&., A grant of authority by a shareholder allowing for another individual to vote his4her shares is a .

B. , ro"y.

3(., 8hich of the following is a legiti!ate reason the valuation of co!!on stoc is generally harder than the valuation of bonds9

. <uture cash flows on stocs are not nown in advance.;. )o!!on stocs don't have a !aturity date.;;. )o!!on stoc valuation is sensitive to esti!ates of the dividend growth rate.

A. , ; only

=. , ; and ;; only

). , ; and ;;; only

%. , ;; and ;;; only

E. , ;, ;;, and ;;;

3*., 8hich of the following is true about the differences between debt and co!!on stoc9

A. , %ebt is ownership in a fir! but euity is not.

=. , )reditors have voting power while stocholders do not.

). , eriodic pay!ents !ade to either class of security are ta" deductible for the issuer.

D. , ;nterest pay!ents are pro!ised while dividend pay!ents are not.

+. , =ondholders can also own euity, but not vice versa.



3-., >ou are considering investing in a fir! and wish to place a value on the co!!on stoc. The dividend on the fir!'s stoc has not changed in the last five years. Absent annfor!ation suggesting future changes in the dividend rate, the !ost appropriate stoc valuation !odel would be the !odel.

A. , 7ero growth.

=. , 6upernor!al growth.

). , on5constant growth.

%. , Growing perpetuity.

+. , =ond pricing.

3/., ?ver the past four years, a co!pany has paid dividends of @1., @1.1, @1.2, and @1.3, respectively. This pattern is e"pected to continue into the future. This is an e"a!of a co!pany paying a:

A. , %ividend that grows by 1 each year.

=. , %ividend that grows at a constant rate.

). , %ividend that grows by a decreasing a!ount.

D. , %ividend that grows at a decreasing rate.

+. , referred stoc dividend.

3., %ividends on the co!!on stoc of 6table ;nc. are e"pected to grow at a constant rate forever. ;f you are told 6table's !ost recent dividend paid, its dividend growth rate, a discount rate, you can calculate .

. The price today.;. The price five years fro! now.;;. The dividend that is e"pected to be paid 1 years fro! now.

A. , ; only

=. , ; and ;; only

). , ; and ;;; only

%. , ;; and ;;; only

E. , ;, ;;, and ;;;

&., 8hich of the following is #are$ true9

. The dividend growth !odel only holds if, at so!e point in ti!e, the dividend growth rate e"ceeds the stoc's reuired return.;. A decrease in the dividend growth rate will increase a stoc's !aret value, all else the sa!e.;;. An increase in the reuired return on a stoc will decrease its !aret value, all else the sa!e.

A. , ; only

B. , ;;; only

). , ;; and ;;; only

%. , ; and ;;; only

+. , ;, ;;, and ;;;



&1., >ou are atte!pting to value a stoc in an industry where fir!s are generating e"ceptional dividend growth, but this growth is e"pected to slow to an euilibriu! growth rn about five years. ?f the stoc valuation !odels studied, the !ost appropriate is the .

A. , erpetuity !odel.

=. , )onstant growth !odel.

C. , 6upernor!al growth !odel.

%. , erpetual growth !odel.

+. , referred stoc !odel.

&2., As illustrated using the dividend growth !odel, the total return on a share of co!!on stoc is co!prised of a .

A. , )apital gains yield and a dividend growth rate.

=. , )apital gains growth rate and a dividend growth rate.

). , %ividend payout ratio and a reuired rate of return.

%. , %ividend yield and the present dividend.

E. , %ividend yield and a capital gains yield.

&3., 8hich of the following is #are$ true9

. The dividend yield on a stoc is the annual dividend divided by the par value.;. 8hen the constant dividend growth !odel holds, g B capital gains yield.;;. The total return on a share of stoc B dividend yield C capital gains yield.

A. , ; only

=. , ;; only

). , ; and ;; only

D. , ;; and ;;; only

+. , ;, ;;, and ;;;

&&., Given no change in reuired returns, the price of a stoc whose dividend is constant will:

A. , ;ncrease over ti!e at a rate of r.

=. , %ecrease over ti!e at a rate of r.

). , ;ncrease over ti!e at a rate eual to the dividend growth rate.

%. , %ecrease over ti!e at a rate eual to the dividend growth rate.

E. , De!ain unchanged.



&(., Assu!e the anticipated growth rate in dividends is constant for <ly5=y5ite Airlines. The e"pected value of the fir!'s stoc at the end of four years # &$ is:

. %(4#r 5 g$;. E #1 C g$&

;;. % E #1 C g$4#r 5 g$

A. , ; only

=. , ;; only

C. , ; and ;; only

%. , ; and ;;; only

+. , ;, ;;, and ;;;

&*., >ou are atte!pting to value the shares of a new, high5technology fir! in a developing industry. >ou would F?6T liely:

A. , se the growth dividend !odel.

B. , se the non5constant growth dividend !odel.

). , se the zero growth dividend !odel.

%. , <ind the value by valuing the stoc as a perpetuity.

+. , ot be able to value this co!pany.

&-., 8hich of the following co!!on shareholder rights ics in when a !erger is proposed9

A. , The right to share proportionately in dividends paid.

=. , The right to share proportionately in re!aining assets fro! a liuidation.

). , The right to vote for directors.

%. , reference over preferred shareholders in the pay!ent of dividends.

E. , The right to vote on shareholder !atters of great i!portance.

&/., 8hich of the following is ?T usually a right of a co!!on stocholder9

A. , Dight of first refusal to buy new preferred stoc, when issued.

=. , ree!ptive right.

). , Dight to receive proportionate dividends, when paid.

%. , Dight to clai! proportionate re!aining assets fro! a liuidation.

+. , Dight to vote by pro"y.



&., >ou Hust voted against a !erger proposal !ade by another corporation. >ou !ust own:

A. , referred stoc.

=. , %ebentures.

C. , )o!!on stoc.

%. , )u!ulative dividend stoc.

+. , )lass = stoc.

(., As a co!!on shareholder in a fir!, which of the following allows you to share proportionately in any new stoc sold9

A. , ro"y voting.

B. , ree!ptive right.

). , )u!ulative voting.

%. , 6traight voting.

+. , %ual class stoc.

(1., 8hich of the following is4are true about co!!on stoc dividends9

. ay!ent of dividends is a ta" deductible business e"pense for a corporation.;. %ividends that have been declared but are not yet paid are liabilities of the corporation.;;. %ividends received by both individuals and corporations are fully ta"able.

A. , ;; only

=. , ;;; only

). , ; and ;;; only

%. , ;; and ;;; only

+. , ;, ;;, and ;;;

(2., 8hich of the following state!ents about dividends is false9

A. , referred stoc dividends often represent a ta"5advantaged invest!ent for so!e corporations.

=. , %ividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by shareholders.

). , The pay!ent of dividends is at the discretion of the board of directors.

%. , The pay!ent of dividends by the corporation is not a ta"5deductible business e"pense.

E. , A corporation can be sued for not paying undeclared dividends.



(3., The pri!ary reason for creating dual or !ultiple classes of stoc has to do with:

A. , +"change listing reuire!ents.

=. , 6atisfying T6I bylaws.

). , <reezing out !inority shareholders.

%. , aying for acuisitions.

E. , )ontrol of the fir!.

(&., ?ften, a fir! creates a second class of stoc that has as co!pared with the first class.

A. , A lower priority in liuidation

=. , The right to cu!ulative dividends

C. , neual voting rights

%. , A pree!ptive right

+. , )u!ulative voting power

((., 8hich of the following is +J+D a right of an owner of a share of preferred stoc9

. The right to share proportionately in preferred dividends paid.;. The right to share proportionately in re!aining assets fro! a liuidation.;;. The right to vote for directors.

A. , ; only

B. , ;;; only

). , ; and ;; only

%. , ;; and ;;; only

+. , ; and ;;; only

(*., 8hich of the following does ?T correctly co!plete this sentence: referred stoc is !uch lie debt in that .

A. , =oth freuently carry credit ratings

=. , =oth can be repaid using a sining fund

). , =oth receive a stated pay!ent fro! the corporation during the year

D. , =oth pay!ents are subHect to the sa!e ta" treat!ent for the issuing fir!

+. , The holders of both get a stated pay!ent in the event of a liuidation



(-., 8hich of the following is a true state!ent regarding publicly traded stocs and bonds9

A. , A share of preferred stoc is generally easier to value than a share of co!!on stoc.

=. , The price of a stoc is greater than the present value of all future dividends.

). , 6toc dividends are a legally5binding liability of the corporation.

%. , A share of preferred stoc represents an ownership interest in a corporation.

+. , referred stoc is !ore lie co!!on stoc than it is lie a bond.

(/., 8hich of the following typically applies to preferred stoc but ?T to co!!on stoc9

A. , ar value.

=. , %ividend yield.

C. , )u!ulative dividends.

%. , ;t is legally considered euity.

+. , The dividends are a ta"5deductible e"pense.

(., 8hich of the following ter!s is typically associated with =?TK preferred stoc and co!!on stoc9

A. , ro"y.

=. , Joting rights.

C. , %ividend yield.

%. , Arrearage.

+. , )u!ulative voting.

*., 8hich of the following is ?T a right of an owner of a share of co!!on stoc9

A. , The right to share proportionately in dividends paid.

=. , The right to share proportionately in re!aining assets fro! a liuidation.

). , The right to vote for directors.

D. , reference over preferred shareholders in the pay!ent of dividends.

+. , The right to vote on stocholder !atters of great i!portance.

*1., 8hich of the following would be considered a violation of the rights of one or !ore classes of a fir!'s staeholders9

A. , )o!!on dividends are paid even though preferred dividends are in arrears.

=. , referred stocholders are paid before co!!on shareholders in a liuidation.

). , )o!!on stocholders are able to place !e!bers on the board of directors to represent their interests in opposition to the board candidates baced by preferred shareholde

%. , )o!!on shareholders are able to vote by pro"y even when they are unable to attend a shareholders' !eeting in person.

+. , %ebt is repaid before preferred shareholders are paid anything in a liuidation.



*2., 8hich of the following ite!s does ?T usually appear in a National Post co!!on stoc uote9

A. , )apital gains rate.

=. , %ividend yield.

). , )losing price.

%. , Kigh and low price for the trading day.

+. , u!ber of shares traded #volu!e$.

*3., ;f two stocs have the sa!e earnings per share and reuired rate of return, differences in the of the two co!panies can account for different stoc prices.

A. , Joting rights.

B. , Growth opportunities.

). , u!ber of shares outstanding.

%. , u!ber of directors.

+. , Jalue of preferred stoc.

*&., can freeze out !inority shareholders.

A. , 6traight voting.

=. , )u!ulative dividends.

). , ro"y voting.

%. , )u!ulative voting.

+. , Fultiple classes of stoc.

*(., >ou wish to be on the board of directors of a co!pany. ;f you wish to buy as low a percentage of the total outstanding shares as is necessary to guarantee yourself a seat ohe board, you should loo for a fir! that has .

A. , )u!ulative preferred stoc.

=. , )u!ulative voting )lass = stoc.

). , )onvertible debentures.

%. , 6traight voting co!!on stoc.

E. , )u!ulative voting co!!on stoc.



**., ;t is !ore difficult to value a stoc than it is to value a bond because:

A. , The future cash flows of a stoc are nown.

=. , The life of an euity security is li!ited.

). , The reuired !aret rate of return on a stoc is nown in advance.

D. , +uity securities have no !aturity date.

+. , The !aturity value of a stoc is nown.

*-., The A=) )o. has paid annual dividends of @.3, @.*&, @1.2, and @1.&( over the past four years. %ividends in the future are e"pected to grow at a constant rate of 3.(8hich one of the following for!ulas should be used to co!pute the value of the stoc today9

A. , B %14#1 C r$1 C %24#1 C r$2 ... C %n4#1 C r$n C n4#1 C r$n

=. , B %4r

). , B %14#1 C r$n C g

D. , B %14#r 5 g$

+. , B %14#r 5 g$n

*/., A supernor!al growth stoc generally:

A. , ;s associated with a co!pany that is e"periencing rapid contraction.

=. , Tends to increase its dividends per share by 3 or !ore for an e"tended nu!ber of years.

C. , Kas high growth dividends only for a li!ited nu!ber of years.

%. , Kas dividends that grow at a high rate for the life of the stoc.

+. , ;s valued using the preferred stoc valuation techniue.

*., %1 in the dividend growth !odel is associated with which of the following words when solving for 9

A. , e"t, e"pected, future.

=. , Last, Hust paid, recent.

). , Must paid, e"pected, past.

%. , aid today, recent, current.

+. , +"pected, paid today, recent.



-., ;f the reuired rate of return used in the dividend growth !odel is increased, then:

A. , The dividend a!ount !ust also increase.

B. , The current value of the stoc will decrease.

). , will increase.

%. , The supernor!al !odel !ust be used to value the stoc.

+. , The growth rate !ust also increase.

-1., 8hich of the following rights are granted to shareholders of co!!on stoc9

. +lection of corporate directors;. 6election of all senior !anage!ent e"ecutives;;. The option of voting by pro"yJ. The right to share in any re!aining assets in a liuidation

A. , ; and ;;; only

=. , ;; and ;J only

). , ;, ;;, and ;;; only

D. , ;, ;;;, and ;J only

+. , ;, ;;, ;;;, and ;J

-2., 8hich of the following state!ents concerning dividends is #are$ correct9

. %ividends beco!e a liability of the corporation at the ti!e they are declared.;. The stocholders deter!ine the a!ount of dividend to be paid.;;. %ividends are a ta" deductible e"pense.J. )o!!on stoc dividends can be either cu!ulative or non5cu!ulative.

A. , ; only

=. , ;; only

). , ; and ;J only

%. , ;; and ;J only

+. , ; and ;;; only

Difficulty: IntermediateLearning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%

&oss - '$a#ter 08 ()*

+y#e: 'once#ts

-3., ;f the !anage!ent of a corporation wants to raise euity capital while !aintaining control over the corporation and li!iting their cash outflows, they should issue shares

A. , on5voting preferred stoc.

=. , Joting preferred stoc.

). , Joting co!!on stoc.

D. , on5voting co!!on stoc.

+. , 7ero coupon bonds.



Difficulty: Intermediate

Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%

&oss - '$a#ter 08 (),+y#e: 'once#ts

-&., 6hareholders of convertible preferred stoc generally have the:

A. , Dight to convert their shares into bonds with an euivalent yield5to5!aturity.

=. , ?bligation to convert their shares into callable shares of co!!on stoc.

). , ?bligation to convert their shares into shares of co!!on stoc.

%. , Dight to convert their shares into cash at par value at their discretion.

E. , Dight to convert their shares into shares of co!!on stoc.


Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 ()

+y#e: 'once#ts

-(., ;t is easier for an outsider to gain control over a corporation when:

A. , Joting by pro"y is not per!itted.

=. , Fanage!ent controls !ost of the co!!on shares outstanding.

C. , )u!ulative voting is used.

%. , referred shares are not convertible.

+. , 6hareholders receive a consistently high rate of return.


Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 ().

+y#e: 'once#ts

-*., 8hich one of the following state!ents is correct concerning the differences between preferred and co!!on stoc9

A. , )o!!on shareholders have first right of priority after creditors in liuidation.

=. , referred shares carry voting rights while co!!on shares do not.

C. , )o!!on shareholders generally have !ore control over a corporation than preferred shareholders.

%. , )o!!on dividends in arrearage !ust be paid prior to any additional preferred stoc dividends.

+. , )o!!on stoc is a for! of euity while preferred stoc is a for! of debt fro! a legal standpoint.

Difficulty: IntermediateLearning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%

&oss - '$a#ter 08 ()/

+y#e: 'once#ts



--., There are three seats open on the board of directors of A=), ;nc. Ann owns voting shares of A=) co!!on stoc. ;f A=) uses cu!ulative voting, the !a"i!u! nu!ber hares that Ann can vote for any one position is eual to:

A. , The nu!ber of open seats.

=. , ?ne5third of the nu!ber of shares owned.

). , The nu!ber of shares owned.

%. , Three ti!es the nu!ber of shares owned !ultiplied by the nu!ber of open seats.

E. , The nu!ber of seats open ti!es the nu!ber of shares owned.

Difficulty: asicLearning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%

&oss - '$a#ter 08 ())

+y#e: 'once#ts

-/., The dividend growth !odel assu!es that:

A. , The rate of growth is constant.

=. , e"t year's dividend is the sa!e a!ount as last year's dividend.

). , The rate of growth e"ceeds the reuired rate of return.

%. , The dividend a!ount used in the for!ula is the last dividend paid.

+. , The valuation is as of the year following the pay!ent of the dividend used in the co!putation.


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%

&oss - '$a#ter 08 ()8

+y#e: 'once#ts

-., The capital gain yield:

A. , 8hen subtracted fro! the dividend yield is eual to the reuired rate of return.

B. , ;s the rate at which the price of the stoc grows.

). , Fust always be a positive value.

%. , ;s eual to the dividend a!ount divided by the current !aret price of the stoc.

+. , ;s the sa!e as the current yield for shares of co!!on stoc.



&oss - '$a#ter 08 ()

+y#e: 'once#ts



/., %eep ocets Fining une"pectedly discovered an e"tre!ely rich vein of gold. 8hich of the following types of shareholders will benefit fro! the increased profits that wbe generated fro! this find9

. referred shareholders;. )onvertible preferred shareholders;;. on5voting co!!on shareholdersJ. )o!!on shareholders

A. , ;J only

=. , ;; and ;J only

). , ; and ;; only

%. , ;, ;;, and ;J only

E. , ;;, ;;;, and ;J only


&oss - '$a#ter 08 (80

+y#e: 'once#ts

/1., Given constant earnings per share, an increase in dividends will generally:

A. , ;ncrease the dividend yield as well as the capital gains yield.

B. , %ecrease the growth rate of the corporation and increase the current yield.

). , ;ncrease the dividend yield and decrease the current yield.

%. , Kave no effect on either the capital gains yield or the total return.

+. , Kave no effect on either the total return or the current yield.

Difficulty: '$allenge


&oss - '$a#ter 08 (81

+y#e: 'once#ts

/2., 8hich of the following state!ents is #are$ correct concerning preferred stoc9

. A !issed dividend pay!ent never has to be paid if the preferred stoc is cu!ulative.;. All preferred stoc has an obligatory sining fund.;;. referred stoc has a stated liuidation value.J. referred stoc is never callable.

A. , ;;; only

=. , ;J only

). , ;;; and ;J only

%. , ;;, ;;;, and ;J only

+. , ;, ;;, and ;;; only



&oss - '$a#ter 08 (8*

+y#e: 'once#ts



/3., 8hat would you pay for a share of A=) )orporation stoc today if the ne"t dividend will be @2 per share, your reuired return on euity invest!ents is 12, and the stoe"pected to be worth @11 one year fro! now9

A. , @(

B. , @1

). , @11

%. , @11(

+. , @12

Difficulty: asicLearning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%

&oss - '$a#ter 08 (8,

+y#e: Problems

/&., The dividend on 6i!ple Fotors co!!on stoc will be @2 in one year, @3.( in two years, and @(. in three years. >ou can sell the stoc for @-( in three years. ;f you rea 1 return on your invest!ent, how !uch would you be willing to pay for a share of this stoc today9

A. , @(.*

=. , @*&.*(

C. , @*&./2

%. , @*(.**

+. , @-1.3

Difficulty: asic


&oss - '$a#ter 08 (8

+y#e: Problems

/(., A stoc that pays a constant dividend of @2.( forever currently sells for @21. 8hat is the reuired rate of return9

A. , 11.

=. , 11.(

). , 12.

%. , 12.(

+. , 13.

F. , Type: roble!s

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (8.



/*., 6uppose oGro, ;nc. has Hust issued a dividend of @2. per share. 6ubseuent dividends will re!ain at @2. indefinitely. Deturns on the stoc of fir!s lie oGro arecurrently running 1(. 8hat is the value of one share of stoc9

A. , @2.

=. , @13.*(

C. , @1.33

%. , @31.2(

+. , @3.-


&oss - '$a#ter 08 (8/

+y#e: Problems

/-., A=) )o!pany's preferred stoc is selling for @2( a share. ;f the reuired return is 12, what will the dividend be two years fro! now9

A. , @2.3

=. , @2.(

C. , @3.

%. , @3.3

+. , @3.-*

Difficulty: asic


&oss - '$a#ter 08 (8)

+y#e: Problems

//., The preferred stoc of the earson ;nstitute pays a constant annual dividend of @3 and sells for @21. >ou believe the stoc will sell for @12 in one year. >ou !ust, therefobelieve that the reuired return on the stoc will be in one year.

A. , /N higher

=. , /N lower

). , N higher

%. , 1N lower

E. , 1N higher

Difficulty: asic


&oss - '$a#ter 08 (88

+y#e: Problems



/., 8hat would you pay today for a stoc that is e"pected to !ae a @1.( dividend in one year if the e"pected dividend growth rate is 3 and you reuire a 1* return on ynvest!ent9

A. , @11.(&

=. , @12.33

). , @12.&3

%. , @13.1&

+. , @1&.3


&oss - '$a#ter 08 (8

+y#e: Problems

., The stoc of FT> Golf 8orld currently sells for @133.-( per share. The fir! has a constant dividend growth rate of - and Hust paid a dividend of @*.21. ;f the reuiredof return is 12, what will the stoc sell for one year fro! now9

A. , @12-.*

=. , @133.-(

C. , @1&3.11

%. , @1&./

+. , @1(2.-/

Difficulty: asic


&oss - '$a#ter 08 (0

+y#e: Problems

1., 6uppose ale Kose, ;nc. has Hust paid a dividend of @1.& per share. 6ales and profits for ale Kose are e"pected to grow at a rate of ( per year. ;ts dividend is e"pectedgrow by the sa!e a!ount. ;f the reuired return is 1, what is the value of a share of ale Kose9

A. , @1&.

=. , @1(.2(

). , @2(./

%. , @2/.

E. , @2.&

Difficulty: asic


&oss - '$a#ter 08 (1+y#e: Problems



2., =oo!er roducts, ;nc. !anufactures 0no5inhale0 cigarettes. As its target custo!ers age and pass on, sales of the product are e"pected to decline. Thus, de!ographics sughat earnings and dividends will decline at a rate of & annually forever. The fir! Hust paid a dividend of @2.(N given a reuired return of 12, the stoc should today should

for:

A. , @1.2(

=. , @12.(

C. , @1(.

%. , @1*.2(

+. , @32.(

Difficulty: asic


&oss - '$a#ter 08 (*

+y#e: Problems

3., =oo!er roducts, ;nc. !anufactures 0no5inhale0 cigarettes. As its target custo!ers age and pass on, sales of the product are e"pected to decline. Thus, de!ographics sughat earnings and dividends will decline at a rate of & annually forever. The fir! Hust paid a dividend of @2.(N given a reuired return is 12, the price of the stoc in two y

will be:

A. , @.&(

=. , @11.(2

C. , @13./2

%. , @1&./

+. , @2.(

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (,

+y#e: Problems

&., Llano's stoc is currently selling for @(1. The e"pected dividend one year fro! now is @1.( and the reuired return is 1. 8hat is this fir!'s dividend growth rate assu!he constant dividend growth !odel is appropriate9

A. , -

=. , /

). ,

%. , 1

+. , 11


&oss - '$a#ter 08 (

+y#e: Problems



(., The current price of I>7 stoc is @(1. %ividends are e"pected to grow at - indefinitely and the !ost recent dividend was @1. 8hat is the reuired rate of return on I>toc9

A. , .

B. , .1

). , .3

%. , 1.*

+. , 11.2


&oss - '$a#ter 08 (.

+y#e: Problems

*., A=) )orporation's co!!on stoc dividend yield is 2.1, it Hust paid a dividend of @1, and is e"pected to pay a dividend of @1.- one year fro! now. %ividends are e"peo grow at a constant rate indefinitely. 8hat is the reuired rate of return on A=) stoc9

A. , .

B. , .1

). , .3

%. , 1.*

+. , 11.2

Difficulty: asic


&oss - '$a#ter 08 (/

+y#e: Problems

-., 6uppose that you have Hust purchased a share of stoc for @22.(1. The !ost recent dividend was @1.( and dividends are e"pected to grow at a rate of ( indefinitely. 8!ust your reuired return be on the stoc9

A. , (.

=. , -.

). , 1.2(

D. , 12.

+. , 13.*-

Difficulty: asic


&oss - '$a#ter 08 () +y#e: Problems



/., Oillnu! )orp. announces that the dividend for the ne"t year will be @2.( per share rather than the originally e"pected @1.( per share. <ro! then on, it is e"pected thatdividends will resu!e their historical constant growth rate of ( per year. 8hat would you e"pect to happen to the price of the stoc9 ;gnore any ta" effects.

A. , The price will liely double.

B. , The price will liely rise by less than 1.

). , The price will liely rise by e"actly (.

%. , The price will re!ain unchanged.

+. , The price will liely rise by the present value of @1.


&oss - '$a#ter 08 (8

+y#e: Problems

., FcGonigal's Feats, ;nc. currently pays no dividends. The fir! plans to begin paying dividends in three years. The first dividend will be @1 and dividends are e"pected togrow at ( thereafter. Given a reuired return of 1(, what would you pay for the stoc today9

A. , @-.1/

B. , @-.(*

). , @/.2

%. , @1.

+. , @1.(

Difficulty: asic


&oss - '$a#ter 08 (

+y#e: Problems

., Fc;ntyre's Foats, ;nc. currently pays no dividends, but the fir! will begin paying dividends in three years. The first dividend will be @2.( and dividends are e"pected grow at 2 thereafter. Given a current !aret price of @((.*2, what is the reuired return on the stoc9

A. , &

=. , (

C. , *

%. , -

+. , /

Difficulty: asic





1., Fc;ver's Feals, ;nc. currently pays a @1 annual dividend. ;nvestors believe that dividends will grow at 1( ne"t year, 1 annually for the two years after that, and (annually thereafter. Assu!e the reuired return is 1. 8hat is the current !aret price of the stoc9

A. , @21.--

=. , @22.

C. , @2(.

%. , @2*.13

+. , @2-.*(


&oss - '$a#ter 08 (101

+y#e: Problems

2., =iogenetics, ;nc. plans to retain and reinvest all of its earnings for the ne"t 3 years. =eginning in year 31, the fir! will begin to pay a @12 per share dividend. The dividwill not subseuently change. Given a reuired return of 1(, what should the stoc sell for today9

A. , @1.21

=. , @2.1(

). , @/.1(

%. , @&2.

+. , @/.

Difficulty: asic


&oss - '$a#ter 08 (10*

+y#e: Problems

3., =iogenetics, ;nc. plans to retain and reinvest all of its earnings for the ne"t 3 years. =eginning in year 31, the fir! will begin to pay a @12 per share dividend. The dividwill increase at a * rate annually thereafter. Given a reuired return of 1(, what the stoc should sell for today9

A. , @1.21

=. , @1.*&

C. , @2.1

%. , @&.3

+. , @13.&(

Difficulty: asic


&oss - '$a#ter 08 (10,+y#e: Problems



&., 6uppose the ale Kose )orp. is e"pected to pay a dividend ne"t year of @1.-( per share. =oth sales and profits for ale Kose are e"pected to grow at a rate of 1( for thfollowing two years and then at 2 per year thereafter indefinitely. %ividend growth is e"pected to !atch sales growth. ;f the reuired return is 1&, what is the value of a shof ale Kose9

A. , @1*.&

=. , @1*./

C. , @1-.2

%. , @1/.&

+. , @1.-*

Difficulty: asic


&oss - '$a#ter 08 (10

+y#e: Problems

(., +nergistics, ;nc. plans to retain and reinvest all of its earnings for the ne"t three yearsN at the end of year 3 the fir! will pay a special dividend of @( per share. =eginningyear &, the fir! will begin to pay a dividend of @1 per share, which is e"pected to grow at a 3 rate annually forever. Given a reuired return of 12, the stoc should sell fo today.

A. , @11.&-

=. , @12.&&

). , @13.1(

%. , @1&.2-

+. , @1(.1

Difficulty: asic


+y#e: Problems

*., Foore Foney ;nc. Hust paid a dividend of @1. The reuired return on the stoc is 1(. ;f it has the following e"pected dividend growth rates what should the stoc sell f

A. , @22.&(

=. , @2*.1-

). , @2-.-

D. , @2/./

+. , @2.*/

Difficulty: asic


&oss - '$a#ter 08 (10/ +y#e: Problems



-., 6uppose that sales and profits of ?ly +nterprises are growing at a rate of 3 per year. At the end of four years the growth rate will drop to a steady &. At the end of y(, ?ly will issue its first dividend in the a!ount of @2 per share. ;f the reuired return is 1*, what is the value of a share of stoc9 Assu!e dividends grow at the sa!e rate aearnings after year &.

A. , @-.&

=. , @-.*-

). , @/.1-

D. , @.2

+. , @.1



&oss - '$a#ter 08 (10)

+y#e: Problems

/., +tling ;nc.'s dividend is e"pected to grow at * for the ne"t two years and then at 3 forever. ;f the current dividend is @3 and the reuired return is 1*, what is the prof the stoc9

A. , @2(.1

=. , @2(./2

). , @2*.1(

%. , @2-.(/

+. , @2.&(

Difficulty: asic



., )=) stoc is e"pected to sell for @22 two years fro! now. 6upernor!al growth of ( is e"pected for the ne"t two years. The current dividend is @1 and the reuired rets 1(. 8hat constant growth rate is e"pected beginning in year 39

A. , *.(

=. , *.-

). , /.1

%. , /.&

E. , .(


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (10

+y#e: Problems



1., ;f Dussian Fotors closed at @22 and the current uarterly dividend is @1.2(, what yield would be reported in +$e National Post 9

A. , (.-

=. , *.(

). , .1

%. , 22.2

E. , 22.-


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (110

+y#e: Problems

11., A fir!'s stoc has a reuired return of 1. The stoc's dividend yield is *. 8hat is the dividend the fir! is e"pected to pay in one year if the current stoc price is @&

A. , @2.

B. , @2.&

). , @2./

%. , @3.2

+. , @3.*


&oss - '$a#ter 08 (111

+y#e: Problems

12., A fir!'s stoc has a reuired return of 1. The stoc's dividend yield is *. 8hat dividend did the fir! Hust pay if the current stoc price is @&9

A. , @2.1/

B. , @2.31

). , @2.(

%. , @2./-

+. , @3.*


&oss - '$a#ter 08 (11*

+y#e: Problems

13., 6asatchewan 6teel, Ltd. and Alberta )opper, ;nc. both recently announced earnings of @&,1. =oth co!panies have co!!on shares outstanding of 2(, and rateeturn of 1. 6asatchewan 6teel has a new proHect that will generate net cash flows of @(, per year forever. Alberta )opper has a new proHect that will generate net cas

flows of @&, per year forever. The stoc price of 6asatchewan 6teel should be greater than the stoc price of Alberta 6teel.

A. , @.&

B. , @.&

). , @3.*

%. , @1,

+. , @1,





&oss - '$a#ter 08 (11,+y#e: Problems

1&., There is an election being held to fill two seats on the board of directors of a fir! in which you hold stoc. There are a total of &2 shares outstanding. ;f the election isconducted under cu!ulative voting and you own 12 shares, how !any !ore shares !ust you buy to be assured of earning a seat on the board9

A. ,

=. , 2

C. , 21

%. , 1

+. , 1&1


&oss - '$a#ter 08 (11

+y#e: Problems

1(., <our directors will be elected and you wish to be one of the!. 8ith cu!ulative voting, what percentage of the shares #plus one$ do you need to have on your side to

guarantee you a seat9

A. , 12.(

=. , 1*.-

C. , 2.

%. , 2(.

+. , 33.3



&oss - '$a#ter 08 (11.

+y#e: Problems

1*., A fir! has 2, shares outstanding. ;f three directors will be elected, how !any shares do you need to control to assure yourself a seat on the board under cu!ulativevoting procedures9

A. , 3,1

=. , &,1

C. , (,1

%. , **,**/

+. , 1,1



&oss - '$a#ter 08 (11/ +y#e: Problems



1-., 6uppose you own ( shares of =iogen co!!on stoc. Two directors are to be elected. 6ince the fir! uses cu!ulative voting, you can cast as !any as votes for a single director.

A. , 1

=. , 2(

). , (

%. , -(

E. , 1,


&oss - '$a#ter 08 (11)

+y#e: Problems

1/., >our fir! is converting fro! cu!ulative voting to straight voting. >ou currently own the !ini!u! nu!ber of shares needed to assure yourself a seat on the board in anelection under cu!ulative voting. Kow !any !ore shares !ust you purchase in order to assure yourself a seat under straight voting9 Assu!e there are a total of (, sharoutstanding and that three directors go up for election at a ti!e.

A. ,

=. , 2(,

C. , 12(,

%. , 2(,

+. , 2(,1




&oss - '$a#ter 08

1., =ig Kat !ust have closed at per share on the previous trading day.

A. , @-.3/

B. , @/.2*

). , @.//

%. , @/.13

+. , @/.(

Difficulty: asicLearning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%

&oss - '$a#ter 08 (11

+y#e: Problems



2., <or the current year, the e"pected dividend per share is:

A. , @1.1

B. , @1.3

). , @1.32

%. , @2.1

+. , @&.&

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1*0

+y#e: Problems

21., Assu!e the e"pected growth rate in dividends is -. Then the constant growth !odel suggests that the reuired return on =ig Kat stoc is:

A. , -.&

=. , -.

). , /.

D. , /.&

+. , ./


&oss - '$a#ter 08 (1*1

+y#e: Problems

22., =ased on the uote, a good esti!ate of +6 over the last four uarters is:

A. , @.1*

=. , @3.2

C. , @*.13

%. , @/.&(

+. , @.-*


&oss - '$a#ter 08 (1**

+y#e: Problems

23., ?n this trading day, the nu!ber of =ig Kat shares that changed hands was:

A. , 2

=. , 2,2

). , 2,2(

%. , 2,2(

E. , 2,2,(



Difficulty: asic

Learning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%

&oss - '$a#ter 08 (1*,+y#e: Problems

&oss - '$a#ter 08

2&., Assu!e that =ig Kat paid a @1.12 annual dividend in the previous period. 8hat is the dividend growth rate based on this uote9

A. , 1.1*

=. , 12.2

). , 1&.1(

D. , 1*.-

+. , 1*.2


&oss - '$a#ter 08 (1*

+y#e: Problems

2(., >ou believe that the reuired return on =ig Kat stoc is 12 and that the e"pected dividend growth rate is 1, which is e"pected to re!ain constant for the foreseeablefuture. ;s the stoc currently overvalued, undervalued, or fairly priced9

A. , ?vervalued

=. , ndervalued

). , <airly priced

%. , )annot tell without !ore infor!ation



&oss - '$a#ter 08 (1*.

+y#e: Problems

2*., Assu!e that =ig Kat is selling at its euilibriu! price. Also assu!e that dividends are e"pected to grow at a constant rate of 2( for the foreseeable future. 8hat is theeuired return on the stoc9

A. , 1/.(

=. , 22.-

). , 2&.1

%. , 2&.-

E. , 2*.-



&oss - '$a#ter 08 (1*/ +y#e: Problems



=radley =roadcasting e"pects to pay dividends of @1.1, @1.21, and @1.331 in one, two, and three years, respectively. After that, dividends are e"pected to grow at a constantof & forever. 6tocs of si!ilar ris yield 1.

&oss - '$a#ter 08

2-., The price of =radley =roadcasting stoc today should be:

A. , @1/.&/

=. , @1.12

C. , @2.33

%. , @21.&*

+. , @22.(*

Difficulty: asic


&oss - '$a#ter 08 (1*)

+y#e: Problems

2/., 8hat is growth rate of the =radley =roadcasting dividend during year 29

A. , 1

=. , 1(

). , 2

%. , 2(

+. , (

Difficulty: asic


&oss - '$a#ter 08 (1*8

+y#e: Problems

2., Kow !uch is =radley's stoc price e"pected to increase during the first year9

A. , 1.(

B. , &.(

). , (.1(

%. , *.2&

+. , *.(1



&oss - '$a#ter 08 (1*+y#e: Problems



3., 8hat is e"pected capital gains yield on =radley =roadcasting stoc during year /9

A. , 3

B. , &

). ,

%. , 1

+. , 1&


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1,0

+y#e: Problems

31., The Mohnson )o!pany Hust paid an annual dividend of @1.*. Kow !uch would you be willing to pay for one share of Mohnson )o!pany stoc if the dividend re!ainsconstant and you reuire a rate of return9

A. , @1&.&

=. , @1*.33

C. , @1-.-/

%. , @1/.21

+. , @1.3/

Difficulty: asic


&oss - '$a#ter 08 (1,1

+y#e: Problems

32., Alhandro, ;nc. Hust paid an annual dividend of @1.3. ;t has been increasing its dividends by & annually and is e"pected to continue doing so. Kow !uch can it e"pect eceive for each new share of stoc offered if investors reuire an 11 rate of return9

A. , @.3*

=. , @.-&

). , @1&.-1

D. , @1(.3

+. , @1(.1



&oss - '$a#ter 08 (1,*

+y#e: Problems



33., The OL6 )o. is e"pected to pay the following annual dividends for the ne"t three years: @1., @1.(, and @1.*, respectively. After that ti!e, it is e"pected to increase idividends by 3 annually. 6tocs si!ilar to OL6 are yielding .(. 8hat is one share of OL6 worth today9

A. , @22.*

=. , @23./-

). , @2-.(

%. , @2-.3

+. , @2.2


&oss - '$a#ter 08 (1,,

+y#e: Problems

3&., The =rown )o!pany Hust announced that it will be increasing its annual dividend to @1.*/ ne"t year and that future dividends will be increased by 2.( annually. Kow!uch would you be willing to pay for one share of the =rown )o!pany stoc if you reuire a 12 rate of return9

A. , @1&.3(

=. , @1&.*3

C. , @1-.*/

%. , @1/.13

+. , @1./1



&oss - '$a#ter 08 (1,

+y#e: Problems

3(., The F;O? )orp. paid @./& in dividends last year. ;t has Hust announced that it e"pects to increase its dividends by 2 each year for the foreseeable future. )urrently,F;O? stoc is priced at @21.32 per share. 8hat is the rate of return on F;O? stoc9

A. , &.1

=. , &.*

). , (./*

%. , (.&

E. , *.2



&oss - '$a#ter 08 (1,.+y#e: Problems



3*., 6wanson =rothers e"pects to pay a @2.2 dividend ne"t year which is an increase of 3.2( over the prior year. After ne"t year, dividends are proHected to grow at a steaate of 2.(. 6hares of 6wanson stoc are currently selling at @1(./ per share. 8hat is the rate of return on 6wanson stoc9

A. , 1&.2-

B. , 1*.&2

). , 1*.--

%. , 1-.1-

+. , 23.**


&oss - '$a#ter 08 (1,/

+y#e: Problems

3-., 6hares of =lue %ye, ;nc. are currently priced at @23.*& a share and produce a total return of 1&./. The annual dividends of =lue %ye have been increasing at a rate of2.& and are e"pected to continue at this rate. 8hat is the e"pected a!ount of the ne"t dividend9

A. , @1.3-

=. , @1.1

). , @2.&1

%. , @2./-

E. , @2.3



&oss - '$a#ter 08 (1,)

+y#e: Problems

3/., Forris, ;nc. has so!e / preferred stoc outstanding. The par value of the preferred stoc is @1. Kow !uch are you willing to pay for one share of Forris preferred sf you reuire a - rate of return9

A. , @/-.(

=. , @/.11

C. , @11&.2

%. , @123./-

+. , @12(.1&

Difficulty: asic


&oss - '$a#ter 08 (1,8+y#e: Problems



3., oshi!a ;ndustries issued dividends totaling @.* last year. <or the ne"t two years, it e"pects dividends to increase by ( annually and then re!ain constant thereafteKow !uch is one share of oshi!a ;ndustries stoc worth today if you reuire a rate of return9

A. , @13.&(

=. , @13.--

C. , @1&.(

%. , @1(.

+. , @1(.1&


&oss - '$a#ter 08 (1,

+y#e: Problems

&., F%O, ;nc. is a high growth fir! that has never paid a dividend. The co!pany Hust issued a press release stating that ne"t year it plans on paying an annual dividend [email protected]&. ;t also stated that dividends are e"pected to increase by & a year for each of the following four years and then increase by & annually thereafter. The reuired rate eturn on this stoc is 1(. 8hat is the e"pected price per share of F%O stoc si" years fro! now9

A. , @.12

=. , @.&2

). , @12.3(

D. , @12./&

+. , @1&.1&




&1., Fahenterin ;nc. is e"pecting to pay @1.23, @., and @1.13 in annual dividends for the ne"t three years respectively. After that, it proHects that dividends will increase by.( annually. Andy is in the 2( !arginal ta" bracet and wants to earn * after5ta" on his invest!ents. Kow !uch is Andy willing to pay today for one share of Fahentenc. stoc9

A. , @1*.

=. , @1-.&

). , @1-.31

%. , @1-.3*

+. , @1-./1

Difficulty: '$allengeLearning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%

&oss - '$a#ter 08 (11

+y#e: Problems



&2., Fichael's ;nc. preferred stoc is currently priced at @12&.3. ;f Fichael's wishes to sell so!e new preferred stoc at par, what rate should it assign to the new shares9

A. , *.-*

B. , -.2&

). , /.(

%. , .

+. , 11.1


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1*

+y#e: Problems

&3., Ma!ie Hust paid @/,23 for 1 shares of * preferred stoc. 8hat rate of return will she earn9

A. , &.&

B. , -.2/

). , /.2&

%. , 1.&

+. , -13.-3


&oss - '$a#ter 08 (1,

+y#e: Problems

&&., The daily newspaper lists this infor!ation on a stoc: Last @3*.1, et )hg 51.*3 and >ld 1.3. 8hat is the a!ount of the current dividend9

A. , @.&&

=. , @.&(

C. , @.&-

%. , @.&

+. , @.(2

Difficulty: IntermediateLearning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%

&oss - '$a#ter 08 (1

+y#e: Problems

&(., A=), ;nc. has earnings per share of @1.&&. The newspaper shows a 4+ of 23 and a dividend of @1.3 for shares of A=), ;nc. stoc. 8hat is the dividend yield9

A. , 3.*

=. , 3./

). , 3.

D. , &.2

+. , &.3




Learning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%

&oss - '$a#ter 08 (1.+y#e: Problems

&*., Leon purchased 1, shares of LMO stoc this !orning at a price of @&(.*- a share. The stoc paid a dividend last year of @1./ per share. Leon's reuired rate of return3 on this type of invest!ent. 8hat is the capital gains yield on LMO stoc9

A. , -.&1

=. , /.-2

C. , .*

%. , 13./(

+. , 1*.&


&oss - '$a#ter 08 (1/

+y#e: Problems

&-., A=) stoc closed yesterday at a price of @3./ a share. The price today was down @2.1. A=) pays a @.&/ annual dividend which has re!ained constant for five year

8hat is the current dividend yield today9

A. , 1.1(

=. , 1.21

C. , 1.2-

%. , 1.31

+. , 1.33



&oss - '$a#ter 08 (1)

+y#e: Problems

&/., An / preferred stoc closed yesterday at a price of @1.32. The stoc closed today at par. 8hat is the current dividend yield9

A. , -.31

=. , -.(

C. , /.

%. , /.-*

+. , /./

Difficulty: asic


&oss - '$a#ter 08 (18

+y#e: Problems



&., Farcy owns 1 shares of %ee's ;nc. while Teri owns 3 shares and Lucie owns ( shares. There are shares outstanding. There are currently three seats open on tboard of directors. 8ith straight voting, how !any additional shares will Farcy have to buy fro! Terri or Lucie to guarantee that she will be elected to the board9

A. ,

=. , 1

). , 1(1

%. , 21

E. , 3(1


&oss - '$a#ter 08 (1

+y#e: Problems

(., There are ( seats open on the board of directors of Alpha, ;nc. Mason wants to be positive that he can be elected to one of these positions. Alpha uses straight voting. Theare 1,( shares of Alpha stoc outstanding. Twenty of the shares are owned by Fidge, 3 are owned by eter, 1 are owned by Meff, 2( are owned by Mason and the are owned by +dward. Kow !any additional shares of stoc !ust Mason buy to ensure that he wins a seat9

A. ,

=. , 2(1

). , 2/

D. , 3-*

+. , &11



&oss - '$a#ter 08 (1.0+y#e: Problems

(1., Farcy owns 1 shares of %ee's ;nc. while Teri owns 3 shares and Lucie owns ( shares. There are shares outstanding. There are currently three seats open on tboard of directors. 8ith cu!ulative voting, how !any additional shares will Farcy have to buy fro! Teri or Lucie to guarantee that she will be elected to the board9

A. ,

=. , *3

C. , 12*

%. , 2(*

+. , 3(1


Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (1.1

+y#e: Problems



(2., There are ( seats open on the board of directors of Alpha, ;nc. Mason wants to be positive that he can be elected to one of these positions. Alpha uses cu!ulative voting.There are 1,( shares of Alpha stoc outstanding. Twenty of the shares are owned by Fidge, 3 are owned by eter, 1 are owned by Meff, 2( are owned by Mason anhe rest are owned by +dward. Kow !any additional shares of stoc !ust Mason buy to ensure that he wins a seat9

A. ,

=. , (*

). , 11*

%. , 2(1

+. , 3-*



&oss - '$a#ter 08 (1.*

+y#e: Problems

(3., Macson 6upply has 2,( shares of stoc outstanding. There are three positions open on the board of directors. A!y wants to be elected to one of those positions. Kow!any !ore shares !ust A!y own to guarantee her election if Macson 6upply uses straight voting as opposed to cu!ulative voting9

A. , *2(

=. , *2*

). , /3&

%. , 12(

+. , 12(1



&oss - '$a#ter 08 (1.,+y#e: Problems

(&., The =attery )o. paid @1.2 in dividends last year. Fargaret paid a price of @1(. a share for =attery )o. stoc and has an e"pected return of / on this invest!ent. 8hhe growth rate of the =attery )o. stoc9

A. ,

=. , &

). , /

%. , 12

+. , 1*



+y#e: Problems



((., An asset characterized by cash flows that increase at a constant rate forever is called a:

A. , growing perpetuity.

=. , growing annuity.

). , co!!on annuity.

%. , perpetuity due.

+. , preferred stoc.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1..

+y#e: Definitions

(*., The stoc valuation !odel that deter!ines the current stoc price by dividing the ne"t annual dividend a!ount by the e"cess of the discount rate less the dividend growtate is called the !odel.

A. , zero growth

B. , dividend growth

). , capital pricing

%. , earnings capitalization

+. , discounted dividend

Difficulty: asic


&oss - '$a#ter 08 (1./

+y#e: Definitions

(-., e"t year's annual dividend divided by the current stoc price is called the:

A. , yield to !aturity.

=. , total yield.

C. , dividend yield.

%. , capital gains yield.

+. , earnings yield.

Difficulty: asic


&oss - '$a#ter 08 (1.)

+y#e: Definitions

(/., The rate at which a stoc's price is e"pected to appreciate #or depreciate$ is called the yield.

A. , current

=. , total

). , dividend

D. , capital gains

+. , earnings



Difficulty: asic


&oss - '$a#ter 08 (1.8+y#e: Definitions

(., A for! of euity which receives preferential treat!ent in the pay!ent of dividends is called stoc.

A. , dual class

=. , cu!ulative

). , deferred

D. , preferred

+. , co!!on

Difficulty: asic


+y#e: Definitions

*., A is a for! of euity security that has a stated liuidating value.

A. , bond

=. , debenture

). , pro"y

%. , co!!on stoc

E. , preferred stoc

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1/0

+y#e: Definitions

*1., A for! of euity which receives no preferential treat!ent in either the pay!ent of dividends or in banruptcy distributions is called stoc.

A. , dual class

=. , cu!ulative

). , deferred

%. , preferred

E. , co!!on


&oss - '$a#ter 08 (1/1

+y#e: Definitions



*2., The voting procedure where you !ust own ( plus one of the outstanding shares of stoc to guarantee that you will win a seat on the board of directors is called voting.

A. , de!ocratic

=. , cu!ulative

C. , straight

%. , deferred

+. , pro"y


&oss - '$a#ter 08 (1/*

+y#e: Definitions

*3., The Ma!es Diver )o. pays an annual dividend of @1.( per share on its co!!on stoc. This dividend a!ount has been constant for the past 1( years and is e"pected toe!ain constant. Given this, one share of Ma!es Diver )o. stoc:

A. , is basically worthless as it offers no growth potential.

=. , has a !aret value eual to the present value of @1.( paid one year fro! today.

C. , is valued as if the dividend paid is a perpetuity.

%. , is valued with an assu!ed growth rate of 3.

+. , has a !aret value of @1(..

Difficulty: asic


&oss - '$a#ter 08 (1/,

+y#e: 'once#ts

*&., The co!!on stoc of the Oenwith )o. pays a constant annual dividend. Thus, the !aret price of Oenwith stoc will:

A. , also re!ain constant.

=. , increase over ti!e.

). , decrease over ti!e.

%. , increase when the !aret rate of return increases.

E. , decrease when the !aret rate of return increases.

Difficulty: asic


&oss - '$a#ter 08 (1/

+y#e: 'once#ts



*(., The Ooster )o. currently pays an annual dividend of @1. and plans on increasing that a!ount by ( each year. The Oeyser )o. currently pays an annual dividend of @and plans on increasing its dividend by 3 annually. Given this, it can be stated with certainty that the of the Ooster )o. stoc is greater than the of the Oeyser )toc.

A. , !aret priceN !aret price

=. , dividend yieldN dividend yield

C. , rate of capital gainN rate of capital gain

%. , total returnN total return

+. , capital gainsN dividend yield

Difficulty: asic


&oss - '$a#ter 08 (1/.

+y#e: 'once#ts

**., The dividend growth !odel:

. assu!es that dividends increase at a constant rate forever.;. can be used to co!pute a stoc price at any point of ti!e.;;. states that the !aret price of a stoc is only affected by the a!ount of the dividend.J. considers capital gains but ignores the dividend yield.

A. , ; only

=. , ;; only

). , ;;; and ;J only

D. , ; and ;; only

+. , ;, ;;, and ;;; only

Difficulty: asic


&oss - '$a#ter 08 (1//

+y#e: 'once#ts

*-., The underlying assu!ption of the dividend growth !odel is that a stoc is worth:

A. , the sa!e a!ount to every investor regardless of their desired rate of return.

B. , the present value of the future inco!e which the stoc generates.

). , an a!ount co!puted as the ne"t annual dividend divided by the !aret rate of return.

%. , the sa!e a!ount as any other stoc that pays the sa!e current dividend and has the sa!e reuired rate of return.

+. , an a!ount co!puted as the ne"t annual dividend divided by the reuired rate of return.

Difficulty: asic


&oss - '$a#ter 08 (1/)

+y#e: 'once#ts



*/., Assu!e that you are using the dividend growth !odel to value stocs. ;f you e"pect the !aret rate of return to increase across the board on all euity securities, then yohould also e"pect the:

A. , !aret values of all stocs to increase, all else constant.

=. , !aret values of all stocs to re!ain constant as the dividend growth will offset the increase in the !aret rate.

C. , !aret values of all stocs to decrease, all else constant.

%. , stocs that do not pay dividends to decrease in price while the dividend5paying stocs !aintain a constant price.

+. , dividend growth rates to increase to offset this change.


&oss - '$a#ter 08 (1/8

+y#e: 'once#ts

*., Latcher's ;nc. is a relatively new fir! that is still in a period of rapid develop!ent. The co!pany plans on retaining all of its earnings for the ne"t si" years. 6even yearsfro! now, the co!pany proHects paying an annual dividend of @.2( a share and then increasing that a!ount by 3 annually thereafter. To value this stoc as of today, you wo!ost liely deter!ine the value of the stoc years fro! today before deter!ining today's value.

A. , &

=. , (

C. , *

%. , -

+. , /

Difficulty: asic


&oss - '$a#ter 08 (1/+y#e: 'once#ts

-., The Dobert hillips )o. currently pays no dividend. The co!pany is anticipating dividends of @, @, @, @.1, @.2, and @.3 over the ne"t * years, respectively. After thhe co!pany anticipates increasing the dividend by & annually. The first step in co!puting the value of this stoc today, is to co!pute the value of the stoc in year:

A. , 3.

=. , &.

). , (.

D. , *.

+. , -.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1)0

+y#e: 'once#ts



-1., 6upernor!al growth refers to a fir! that increases its dividend by:

A. , three or !ore per year.

B. , a rate which is !ost liely not sustainable over an e"tended period of ti!e.

). , a constant rate of 2 or !ore per year.

%. , @.1 or !ore per year.

+. , an a!ount in e"cess of @.1 a year.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1)1

+y#e: 'once#ts

-2., The total rate of return earned on a stoc is co!prised of which two of the following9

. current yield;. yield to !aturity;;. dividend yieldJ. capital gains yield

A. , ; and ;; only

=. , ; and ;J only

). , ;; and ;;; only

%. , ;; and ;J only

E. , ;;; and ;J only


&oss - '$a#ter 08 (1)*

+y#e: 'once#ts

-3., The total rate of return on a stoc can be positive even when the price of the stoc depreciates because of the:

A. , capital appreciation.

=. , interest yield.

C. , dividend yield.

%. , supernor!al growth.

+. , real rate of return.


&oss - '$a#ter 08 (1),

+y#e: 'once#ts



-&., <red <lintloc wants to earn a total of 1 on his invest!ents. Ke recently purchased shares of A=) stoc at a price of @2 a share. The stoc pays a @1 a year dividendThe price of A=) stoc needs to if <red is to achieve his 1 rate of return.

A. , re!ain constant

=. , decrease by (

C. , increase by (

%. , increase by 1

+. , increase by 1(


&oss - '$a#ter 08 (1)

+y#e: 'once#ts

-(., 8hich one of the following correctly defines the dividend growth !odel9

A. , B % #D 5 g$

=. , % B E #D 5 g$

). , D B # %$ C g

D. , D B #%1 $ C g

+. , B #%1 D$ C g

Difficulty: asic


&oss - '$a#ter 08 (1).+y#e: 'once#ts

-*., 6hareholders generally have the right to:

. elect the corporate directors.;. select the senior !anage!ent of the fir!.;;. elect the chief e"ecutive officer #)+?$.J. elect the chief operating officer #)??$.

A. , ; only

=. , ; and ;;; only

). , ;; only

%. , ; and ;; only

+. , ;;; and ;J only

Difficulty: asic

Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (1)/

+y#e: 'once#ts



--., Mac owns 3( shares of stoc in =eta, ;nc. and wants to e"ercise as !uch control as possible over the co!pany. =eta, ;nc. has a total of 1 shares of stoc outstanding. hare receives one vote. resently, the co!pany is voting to elect two new directors. 8hich one of the following state!ents !ust be true given this infor!ation9

A. , ;f straight voting applies, Mac is assured one seat on the board.

=. , ;f straight voting applies, Mac can control both open seats.

C. , ;f cu!ulative voting applies, Mac is assured one seat on the board.

%. , ;f cu!ulative voting applies, Mac can control both open seats.

+. , Degardless of the type of voting e!ployed, Mac does not own enough shares to control any of the seats.


&oss - '$a#ter 08 (1))

+y#e: 'once#ts

-/., A=) )o. is owned by a group of shareholders, all of who! vote independently and all of who! want personal control over the fir!. ;f straight voting is used, ahareholder:

A. , !ust either own enough shares to totally control the elections or else he4she has no control whatsoever.

=. , will be able to elect at least one director as long as there are at least three open positions and the shareholder owns at least 2( plus one of the outstanding shares.

). , !ust own at least two5thirds of the shares, plus one, to e"ercise control over the elections.

%. , is only per!itted to elect one director, regardless of the nu!ber of shares owned.

+. , who owns !ore shares than anyone else, regardless of the nu!ber of shares owned, will control the elections.

Difficulty: asic


&oss - '$a#ter 08 (1)8

+y#e: 'once#ts

-., The 7ilo )orp. has 1, shareholders and is preparing to elect three new board !e!bers. >ou do not own enough shares to control the elections but are deter!ined to ohe current leadership. The !ost liely result of this situation is a:

A. , negotiated settle!ent where you are granted control over one of the three open positions.

=. , legal battle for control of the fir! based on your discontent as an individual shareholder.

). , arbitrated settle!ent whereby you are granted control over one of the three open positions.

%. , total loss of power for you since you are a !inority shareholder.

E. , pro"y fight for control of the fir!.

Difficulty: asic


&oss - '$a#ter 08 (1)+y#e: 'once#ts



/., )o!!on stoc shareholders are generally granted rights which include the right to:

. share in co!pany profits.;. vote for co!pany directors.;;. vote on proposed !ergers.J. residual assets in a liuidation.

A. , ; and ;; only

=. , ;; and ;;; only

). , ; and ;J only

%. , ;, ;;, and ;J only

E. , ;, ;;, ;;;, and ;J

Difficulty: asic

Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (180

+y#e: 'once#ts

/1., The 6cott )o. has a general dividend policy whereby it pays a constant annual dividend of @1 per share of co!!on stoc. The fir! has 1, shares of stoc outstandingThe co!pany:

A. , !ust always show a current liability of @1, for dividends payable.

=. , is obligated to continue paying @1 per share per year.

). , will be declared in default and can face banruptcy if it does not pay @1 per year to each shareholder on a ti!ely basis.

%. , has a liability which !ust be paid at a later date should the co!pany !iss paying an annual dividend pay!ent.

E. , !ust still declare each dividend before it beco!es an actual co!pany liability.

Difficulty: asic


&oss - '$a#ter 08 (181

+y#e: 'once#ts

/2., The dividends paid by a corporation:

. to an individual beco!es ta"able inco!e of that individual.;. reduce the ta"able inco!e of the corporation.;;. are declared by the chief financial officer of the corporation.J. to another corporation !ay or !ay not represent ta"able inco!e to the recipient.

A. , ; only

B. , ; and ;J only

). , ;; and ;;; only

%. , ;, ;;, and ;J only

+. , ;, ;;;, and ;J only

Difficulty: asic


&oss - '$a#ter 08 (18*

+y#e: 'once#ts



/3., The owner of preferred stoc:

A. , is entitled to a distribution of inco!e prior to the co!!on shareholders.

=. , has the right to veto the outco!e of an election held by the co!!on shareholders.

). , has the right to declare the co!pany banrupt whenever there are insufficient funds to pay dividends to the co!!on shareholders.

%. , receives ta"5free dividends if it is an individual and own !ore than 2 of the outstanding preferred shares.

+. , has the right to collect pay!ent on any unpaid dividends as long as the stoc is noncu!ulative preferred.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (18,

+y#e: 'once#ts

/&., A * preferred stoc pays a year in dividends per share. The par value of the preferred stoc is @1.

A. , @3

B. , @*

). , @12

%. , @3

+. , @*


&oss - '$a#ter 08 (18

+y#e: 'once#ts

/(., 8hich one of the following state!ents concerning preferred stoc is correct9

A. , npaid preferred dividends are a liability of the fir!.

=. , referred dividends !ust be paid uarterly provided the fir! has net inco!e that e"ceeds the a!ount of the uarterly dividend.

). , referred dividends !ust be paid ti!ely each uarter or the unpaid dividends start accruing interest.

%. , All unpaid dividends on preferred stoc, regardless of the type of preferred, !ust be paid before any inco!e can be distributed to co!!on shareholders.

E. , referred shareholders !ay be granted voting rights and seats on the board if preferred dividend pay!ents re!ain unpaid.


&oss - '$a#ter 08 (18.

+y#e: 'once#ts

/*., ;n a liuidation, each share of ( preferred stoc is generally entitled to a liuidation pay!ent of as long as there are sufficient funds available. The par value of preferred stoc is @1.

A. , @1

=. , @(

). , @1

%. , @(

E. , @1



Difficulty: asic


&oss - '$a#ter 08 (18/ +y#e: 'once#ts

/-., The closing price of a stoc is uoted at 22./-, with a 4+ of 2* and a net change of 1.&2. =ased on this infor!ation, which one of the following state!ents is correct9

A. , The closing price on the previous day was @1.&2 higher than today's closing price.

=. , A dealer will buy the stoc at @22./- and sell it at @2* a share.

). , The stoc increased in value between yesterday's close and today's close by @.1&2.

D. , The earnings per share are eual to 142*th of @22./-.

+. , The earnings per share have increased by @1.&2 this year.

Difficulty: asic

Learning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%&oss - '$a#ter 08 (18)

+y#e: 'once#ts

//., A stoc listing contains the following infor!ation: 4+ 1-.(, closing price 33.1, dividend ./, >T% chg 3.&, and a net chg of 5.(. 8hich of the following state!ents correct given this infor!ation9

. The stoc price has increased by 3.& during the current year.;. The closing price on the previous trading day was @32.*.;;. The earnings per share are appro"i!ately @1./.J. The current yield is 1-.(.

A. , ; and ;; only

B. , ; and ;;; only

). , ;; and ;;; only

%. , ;;; and ;J only

+. , ;, ;;;, and ;J only

Difficulty: asicLearning Objective: 08-0 +$e stoc" mar"et 2uotations and t$e basics of stoc" mar"et re#orting%

&oss - '$a#ter 08 (188

+y#e: 'once#ts

/., Angelina's !ade two announce!ents concerning its co!!on stoc today. <irst, the co!pany announced that its ne"t annual dividend has been set at @2.1* a share.6econdly, the co!pany announced that all future dividends will increase by & annually. 8hat is the !a"i!u! a!ount you should pay to purchase a share of Angelina's stocyour goal is to earn a 1 rate of return9

A. , @21.*

=. , @22.&*

). , @2-.&&

%. , @3&.*2

E. , @3*.

Difficulty: asic





., Kow !uch are you willing to pay for one share of stoc if the co!pany Hust paid a @./ annual dividend, the dividends increase by & annually and you reuire an / rof return9

A. , @1.23

=. , @2.

). , @2.&

D. , @2./

+. , @21.*3


&oss - '$a#ter 08 (10

+y#e: Problems

1., Lee Kong ;!ports paid a @1. per share annual dividend last wee. %ividends are e"pected to increase by ( annually. 8hat is one share of this stoc worth to you tof the appropriate discount rate is 1&9

A. , @-.1&

=. , @-.(

). , @11.11

D. , @11.*-

+. , @12.2(

Difficulty: asic


&oss - '$a#ter 08 (11

+y#e: Problems

2., FaHestic Ko!es stoc traditionally provides an / rate of return. The co!pany Hust paid a @2 a year dividend, which is e"pected to increase by ( per year. ;f you areplanning on buying 1, shares of this stoc ne"t year, how !uch should you e"pect to pay per share if the !aret rate of return for this type of security is at the ti!e ofpurchase9

A. , @&/.*

B. , @(2.(

). , @((.13

%. , @(-./

+. , @-.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (1*

+y#e: Problems



3., Fartin's >achts has paid annual dividends of @1.&, @1.-(, and @2. a share over the past three years, respectively. The co!pany now predicts that it will !aintain aconstant dividend since its business has leveled off and sales are e"pected to re!ain relatively constant. Given the lac of future growth, you will only buy this stoc if you caearn at least a 1( rate of return. 8hat is the !a"i!u! a!ount you are willing to pay to buy one share of this stoc today9

A. , @1.

B. , @13.33

). , @1*.*-

%. , @1/.//

+. , @2.

Difficulty: asic


&oss - '$a#ter 08 (1,

+y#e: Problems

&., The current yield on Alpha's co!!on stoc is &./. The co!pany Hust paid a @2.1 dividend. The ru!our is that the dividend will be @2.2( ne"t year. The dividend grate is e"pected to re!ain constant at the current level. 8hat is the reuired rate of return on Alpha's stoc9

A. , 1.&

=. , 1*.-

). , 21.//

%. , &3.-(

+. , &(.&

Difficulty: asic



(., Fathilda's Jineyard recently paid a @3.* annual dividend on its co!!on stoc. This dividend increases at an average rate of 3.( per year. The stoc is currently sellinfor @*2.1 a share. 8hat is the !aret rate of return9

A. , 2.(

=. , 3.(

). , (.(

%. , *.

E. , .(

Difficulty: asic


+y#e: Problems



*., =et'D =ilt =ies Hust announced that its annual dividend for this co!ing year will be @2.&2 a share and that all future dividends are e"pected to increase by 2.( annuall8hat is the !aret rate of return if this stoc is currently selling for @22 a share9

A. , .(

=. , 11.

). , 12.(

D. , 13.(

+. , 1(.


&oss - '$a#ter 08 (1/

+y#e: Problems

-., The co!!on stoc of Grady )o. returned an 11.2( rate of return last year. The dividend a!ount was @.- a share which euated to a dividend yield of 1.(. 8hat waate of price appreciation on the stoc9

A. , 1.(

=. , /.

C. , .-(

%. , 11.2(

+. , 12.-(

Difficulty: asic


&oss - '$a#ter 08 (1)

+y#e: Problems

/., The co!!on stoc of +nergizer's pays an annual dividend that is e"pected to increase by 1 annually. The stoc co!!ands a !aret rate of return of 12 and sells fo@*.( a share. 8hat is the e"pected a!ount of the ne"t dividend to be paid on +nergizer's co!!on stoc9

A. , @.

=. , @1.

). , @1.1

D. , @1.21

+. , @1.33

Difficulty: asic





., The Deading )o. has adopted a policy of increasing the annual dividend on its co!!on stoc at a constant rate of 3 annually. The last dividend it paid was @. a sha8hat will its dividend be in si" years9

A. , @.

=. , @.3

). , @1.&

%. , @1.-

E. , @1.11


&oss - '$a#ter 08 (1

+y#e: Problems

2., A stoc pays a constant annual dividend and sells for @31.11 a share. ;f the rate of return on this stoc is , what is the dividend a!ount9

A. , @1.&

=. , @1./

). , @2.2

%. , @2.&

E. , @2./

Difficulty: asic


&oss - '$a#ter 08 (*00

+y#e: Problems

21., >ou have decided that you would lie to own so!e shares of GK )orp. but need an e"pected 12 rate of return to co!pensate for the perceived ris of such ownership8hat is the !a"i!u! you are willing to spend per share to buy GK stoc if the co!pany pays a constant @3.( annual dividend per share9

A. , @2*.&

B. , @2.1-

). , @32.*-

%. , @3&.2

+. , @3*.(

Difficulty: asic


&oss - '$a#ter 08 (*01

+y#e: Problems



22., Turnips and arsley co!!on stoc sells for @3./* a share at a !aret rate of return of .(. The co!pany Hust paid its annual dividend of @1.2. 8hat is the rate of grof its dividend9

A. , (.2

=. , (.(

). , (.

%. , *.

E. , *.3


&oss - '$a#ter 08 (*0*

+y#e: Problems

23., 8ilbert's )lothing 6tores Hust paid a @1.2 annual dividend. The co!pany has a policy whereby the dividend increases by 2.( annually. >ou would lie to purchase 1hares of stoc in this fir! but realize that you will not have the funds to do so for another three years. ;f you desire a 1 rate of return, how !uch should you e"pect to pay shares when you can afford to buy this stoc9 ;gnore trading costs.

A. , @1,*&

=. , @1,*/1

). , @1,-23

D. , @1,-**

+. , @1,/1

Difficulty: asic


&oss - '$a#ter 08 (*0,+y#e: Problems

2&., The Ferriweather )o. Hust announced that it is increasing its annual dividend to @1.* and establishing a policy whereby the dividend will increase by 3.( annuallyhereafter. Kow !uch will one share of this stoc be worth five years fro! now if the reuired rate of return is 129

A. , @21.*

B. , @22.3*

). , @23.1&

%. , @23.(

+. , @2&.-

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*0

+y#e: Problems



2(., 6hares of the Oatydid )o. co!!on stoc are currently selling for @2-.-3. The last dividend paid was @1.* per share. The !aret rate of return is 1. At what rate is thdividend growing9

A. , 2.(

B. , &.

). , (./

%. , 13.(

+. , 1&.1


&oss - '$a#ter 08 (*0.

+y#e: Problems

2*., The +"tre!e Deaches )orp. last paid a @1.( per share annual dividend. The co!pany is planning on paying @3., @(., @-.(, and @1. a share over the ne"t fouryears, respectively. After that the dividend will be a constant @2.( per share per year. 8hat is the !aret price of this stoc if the !aret rate of return is 1(9

A. , @1-.&

=. , @22.3

C. , @2*.(-

%. , @2./

+. , @33.-1

Difficulty: asic


&oss - '$a#ter 08 (*0/

+y#e: Problems

2-., )an't Kold Fe =ac, ;nc. is preparing to pay its first dividends. ;t is going to pay @1., @2.(, and @(. a share over the ne"t three years, respectively. After that, theco!pany has stated that the annual dividend will be @1.2( per share indefinitely. 8hat is this stoc worth to you per share if you de!and a - rate of return9

A. , @-.2

=. , @1&.&/

). , @1/.//

D. , @21.-/

+. , @2(.*

Difficulty: asic


&oss - '$a#ter 08 (*0) +y#e: Problems



2/., ow or Later, ;nc. recently paid @1.1 as an annual dividend. <uture dividends are proHected at @1.1&, @1.1/, @1.22, and @1.2( over the ne"t four years, respectively.=eginning five years fro! now, the dividend is e"pected to increase by 2 annually. 8hat is one share of this stoc worth to you if you reuire an / rate of return on si!ilanvest!ents9

A. , @1(.*2

B. , @1.(-

). , @21.21

%. , @23.33

+. , @2(./

Difficulty: asic


&oss - '$a#ter 08 (*08

+y#e: Problems

2., =ill =ailey and 6ons pays no dividend at the present ti!e. The co!pany plans to start paying an annual dividend in the a!ount of @.3 a share for two years co!!encinwo years fro! today. After that ti!e, the co!pany plans on paying a constant @1 a share dividend indefinitely. Kow !uch are you willing to pay to buy a share of this stoc

your reuired return is 1&9

A. , @&./2

B. , @(.2(

). , @(.3

%. , @(.&*

+. , @(.(/

Difficulty: asic


+y#e: Problems

21., The Lighthouse )o. is in a downsizing !ode. The co!pany paid a @2.( annual dividend last year. The co!pany has announced plans to lower the dividend by @.( a y?nce the dividend a!ount beco!es zero, the co!pany will cease all dividends per!anently. >ou place a reuired rate of return of 1* on this particular stoc given theco!pany's situation. 8hat is one share of this stoc worth to you today9

A. , @3.-*

=. , @&./

). , @&./-

%. , @(.13

+. , @(.3

Difficulty: asic


&oss - '$a#ter 08 (*10

+y#e: Problems



211., Fother and %aughter +nterprises is a relatively new fir! that appears to be on the road to great success. The co!pany paid its first annual dividend yesterday in the a!oof @.2/ a share. The co!pany plans to double each annual dividend pay!ent for the ne"t three years. After that ti!e, it is planning on paying a constant @1.( per sharendefinitely. 8hat is one share of this stoc worth today if the !aret rate of return on si!ilar securities is 11.(9

A. , @.&1

=. , @11.&

). , @11.&*

%. , @11.3

E. , @12.&3

Difficulty: asic


&oss - '$a#ter 08 (*11

+y#e: Problems

212., =) 'n % Hust paid its annual dividend of @.* a share. The proHected dividends for the ne"t five years are @.3, @.(, @.-(, @1., and @1.2, respectively. After that ti!e, dividends will be held constant at @1.&. 8hat is this stoc worth today at a * discount rate9

A. , @2.&/

=. , @2.*

). , @21.2

%. , @21.2/

+. , @21.&3

Difficulty: asic


&oss - '$a#ter 08 (*1*+y#e: Problems

213., =easley, ;nc. is a very cyclical type of business which is reflected in its dividend policy. The fir! pays a @2. a share dividend every other year. The last dividend waspaid last year. <ive years fro! now, the co!pany is repurchasing all of the outstanding shares at a price of @( a share. At an / rate of return, what is this stoc worth today

A. , @3&.3

B. , @3-.21

). , @&3.-/

%. , @&/.

+. , @(3.1/

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*1,

+y#e: Problems



21&., u5Te, ;nc. is e"pecting a period of intense growth, so it has decided to retain !ore of its earnings to help finance that growth. As a result it is going to reduce its annudividend by 1 a year for the ne"t three years. After that it will !aintain a constant dividend of @.- a share. Last year, the co!pany paid @1./ per share. 8hat is the !arvalue of this stoc if the reuired rate of return is 139

A. , @*.-

B. , @-.22

). , @/.22

%. , @/./-

+. , @.1

Difficulty: asic


&oss - '$a#ter 08 (*1

+y#e: Problems

21(., The %ouble %ip )o. is e"pecting its ice crea! sales to decline due to the increased interest in healthy eating. Thus, the co!pany has announced that it will be reducing iannual dividend by ( a year for the ne"t two years. After that, it will !aintain a constant dividend of @1 a share. Last year, the co!pany paid @1.& per share. 8hat is this stworth to you if you reuire a rate of return9

A. , @1./*

=. , @11.11

C. , @11.*&

%. , @12./

+. , @1&.23

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*1.

+y#e: Problems

21*., =utterup's ' Fore wants to offer so!e preferred stoc that pays an annual dividend of @2. a share. The co!pany has deter!ined that stocs with si!ilar characteristiprovide a rate of return. 8hat price should =utterup's e"pect to receive per share for this stoc offering9

A. , @1/.3(

=. , @2.

). , @21./

D. , @22.22

+. , @2&.22


&oss - '$a#ter 08 (*1/

+y#e: Problems



21-., The preferred stoc of orth )oast 6horeline pays an annual dividend of @1.- and sells for @2.2& a share. 8hat is the rate of return on this security9

A. , (.(

=. , -./

C. , /.&

%. , 11.

+. , 1&.1-

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*1)

+y#e: Problems

21/., Mi! owns shares of Abco, ;nc. preferred stoc which he says provides hi! with a constant *.(/ rate of return. The stoc is currently priced at @&(.* a share. 8hat is ta!ount of the dividend per share9

A. , @3.

=. , @3.1(

). , @3.(

%. , @3.(&

+. , @3.*2

Difficulty: asic


&oss - '$a#ter 08 (*18

+y#e: Problems

21., >ou want to earn a 12 rate of return. anco, ;nc. preferred stoc pays a @&.( annual dividend. 8hat is the !a"i!u! price you are willing to pay for one share of thistoc9

A. , @32.(

B. , @3-.(

). , @3.

%. , @&.(

+. , @&(.

Difficulty: asic


&oss - '$a#ter 08 (*1

+y#e: Problems

22., )u!ulative voting is the procedure whereby a shareholder:

A. , can authorize another party to vote on his or her behalf.

=. , casts one vote per share of stoc owned for each open position on the board of directors.

C. , !ay cast all of his or her votes for one candidate for the board of directors.

%. , who owns preferred stoc can cast his or her votes for candidates for the board of directors.

+. , can revote until a !aHority of the votes are cast for one candidate for each seat on the board of directors.



Difficulty: asic


&oss - '$a#ter 08 (**0+y#e: Definitions

221., >ou own 1 shares of I> )orporation. There are several ey ite!s which will be voted on at the ne"t board !eeting. >ou are unable to physically attend the !eeting bwould lie your votes cast so your opinion counts. The procedure by which you can cast your votes without attending the !eeting is called voting.

A. , straight

=. , cu!ulative

). , distance

D. , pro"y

+. , de!ocratic


&oss - '$a#ter 08 (**1

+y#e: Definitions

222., )urrently, you own ( of the co!!on stoc of Alberta ;ndustries. The right which grants you the ability to !aintain your current level of ownership should the co!pan

opt to issue additional shares of stoc is called the right.

A. , shareholder

=. , percentage

). , cu!ulative

%. , first

E. , pree!ptive

Difficulty: asic


&oss - '$a#ter 08 (***

+y#e: Definitions

223., Fartin ;ndustries pays a constant @2.( a share annual dividend. The !aret price of this stoc will:

A. , be greater five years fro! now than it is today provided that the !aret rate of return re!ains constant.

=. , re!ain constant even as the !aret rate of return varies.

). , increase when the !aret rate of return increases.

D. , decrease if the reuired return increases.

+. , re!ain constant as long as the dividend re!ains constant.

Difficulty: asic


&oss - '$a#ter 08 (**,

+y#e: 'once#ts



22&., All else constant, which of the following will increase the dividend yield of a stoc9

. an increase in the dividend a!ount;. a decrease in the dividend a!ount;;. an increase in the stoc priceJ. a decrease in the stoc price

A. , ; only

=. , ;; only

). , ;;; only

D. , ; and ;J only

+. , ;; and ;;; only

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (**

+y#e: 'once#ts

22(., The dividend growth !odel:

A. , values a stoc based solely on the rate of dividend growth.

=. , can be used to value all co!!on stocs.

C. , considers both the dividend yield and the capital gains yield.

%. , cannot be used to value zero growth dividend stocs.

+. , is independent of an investor's reuired rate of return.


&oss - '$a#ter 08 (**.

+y#e: 'once#ts

22*., )harlie's <ish Faret is planning on paying annual dividends of @1.2, @1.3(, and @1.( over the ne"t 3 years, respectively. After that, )harlie's plans to pay a constantdividend of @1.-( per share each year. To co!pute the value of )harlie's stoc today, you should first deter!ine the value of the stoc at the end of year .

A. ,

=. , 1

). , 2

D. , 3

+. , &

Difficulty: asic


&oss - '$a#ter 08 (**/

+y#e: 'once#ts



22-., The dividend yield on a co!!on stoc is !ost si!ilar to which yield on a bond9

A. , yield to !aturity

=. , yield to call

). , coupon yield

%. , !aret yield

E. , current yield

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (**)

+y#e: Definitions

22/., )arlos owns ( shares of 6a!son Ti!ber. This year, there are 3 open seats on the board of directors. ;f 6a!son uses cu!ulative voting, )arlos will receive a total of votes of which he can cast a !a"i!u! of votes for one candidate.

A. , 1*-N 1*-

=. , (N 1*-

). , (N (

%. , 1,(N (

E. , 1,(N 1,(

Difficulty: asic


&oss - '$a#ter 08 (**8

+y#e: 'once#ts

22., +verson ;!porters has 1,( shares of co!!on stoc outstanding of which %ino owns ( shares. The co!pany has 3 open seats on the board of directors. %ino wishesbe elected to the board but realizes that no one else will vote for hi!. To guarantee his election, %ino will have to own of 1,( plus 1 of the shares if the fir! uses strvoting versus owning of 1,( plus 1 of the shares if the fir! uses cu!ulative voting.

A. , 14&thN 143rd

=. , 14&thN 142

). , 143rdN 142

%. , 142N 143rd

E. , 142N 14&th

Difficulty: asic


&oss - '$a#ter 08 (**+y#e: 'once#ts



23., referred shareholders are generally granted the right to:

A. , vote for the !e!bers of the board of directors.

=. , vote on any proposed !erger or acuisition.

). , receive pay!ent prior to the creditors in a liuidation.

D. , first priority for any dividend distributions.

+. , collect prior dividends which were unpaid provided that the stoc is noncu!ulative.

Difficulty: asic

Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (*,0

+y#e: 'once#ts

231., )o!!on stocholders have the right to:

A. , receive dividends prior to the holders of noncu!ulative preferred stoc.

=. , receive a dividend prior to interest being paid on outstanding debt.

). , vote for the vice5presidents of the fir!.

D. , vote on any proposed acuisition or !erger.

+. , receive dividends prior to the cu!ulative preferred shareholders.


&oss - '$a#ter 08 (*,1

+y#e: 'once#ts

232., %ividends on co!!on stoc:

A. , are auto!atically paid every three !onths.

=. , !ust be paid in cash.

). , are considered in default if the board fails to declare the! at least once per year.

%. , are a ta" deductible e"pense to the corporation.

E. , !ust be declared to beco!e a liability of the fir!.


&oss - '$a#ter 08 (*,*

+y#e: 'once#ts

233., A.G. Tho!as P 6ons Hust paid an annual dividend of @2.2(. ;n conHunction with the pay!ent, the co!pany announced that future dividends will be increasing by 3. ;feuire an 11 rate of return, how !uch are you willing to pay today to purchase one share of Tho!as' stoc9

A. , @2/.13

B. , @2/.-

). , @2.3

%. , @2.2

+. , @2./&





23-., ptown Ko!es Hust paid a @1.* annual dividend. This dividend is e"pected to increase by 3 per year. ;f you are planning on buying 1, shares of this stoc one yeafro! now, how !uch should you e"pect to pay per share if the !aret rate of return for this type of security is 13.( at the ti!e of your purchase9

A. , @1.2

=. , @1(.2&

). , @1(.-

D. , @1*.1-

+. , @1*.**


&oss - '$a#ter 08 (*,)

+y#e: Problems

23/., Messica's Ko!e ;nteriors offers a co!!on stoc that pays an annual dividend of @1.* a share. The co!pany has pro!ised to !aintain a constant dividend. Kow !uch ayou willing to pay for one share of this stoc today if you want to earn a return on your invest!ents9

A. , @1-.-/

=. , @1-.-

). , @1/.(

%. , @1/.1*

+. , @1/.3&

Difficulty: asic


&oss - '$a#ter 08 (*,8

+y#e: Problems

23., Treynor ;ndustries has paid annual dividends of @1.((, @1.-, and @1./( a share over the past three years, respectively. The co!pany now predicts that it will !aintain aconstant dividend since its business has leveled off and sales are e"pected to re!ain relatively constant. Given the lac of future growth, you will only buy this stoc if you caearn at least a 1* rate of return. 8hat is the !a"i!u! a!ount you are willing to pay to buy one share of this stoc today9

A. , @.-

B. , @11.(*

). , @12.-/

%. , @13.&1

+. , @13.(&

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*,

+y#e: Problems



2&., The co!!on stoc of M. O. La!inates sells for @32.* a share. The stoc is e"pected to pay @2.1 per share ne"t !onth when the annual dividend is distributed. M. O.'s hestablished a pattern of increasing its dividends by 3.( annually and e"pects to continue doing so. 8hat is the !aret rate of return on this stoc9

A. , *.&&

=. , *.*-

). , -.3

D. , .&

+. , 1.2


&oss - '$a#ter 08 (*0

+y#e: Problems

2&1., The current yield on 7eta's co!!on stoc is (.*. The co!pany pays a constant dividend of @1./. 8hat is the reuired rate of return on 7eta's stoc9

A. , 3./

B. , (.*

). , (.//

%. , -.&

+. , -.*(

Difficulty: asic


&oss - '$a#ter 08 (*1

+y#e: Problems

2&2., 8est )oast 8ines recently paid a @&.& annual dividend on its co!!on stoc. This dividend increases at an average rate of & per year. The stoc is currently selling [email protected] a share. 8hat is the !aret rate of return9

A. , *.11

=. , *.(1

). , *.--

%. , 1.11

E. , 1.(1

Difficulty: asic


&oss - '$a#ter 08 (**

+y#e: Problems



2&3., Fountain Gear, ;nc. Hust announced that its annual dividend for this co!ing year will be @1.& a share and that all future dividends are e"pected to increase by &.(annually. 8hat is the !aret rate of return if this stoc is currently selling for @2/ a share9

A. , (.

=. , (.23

C. , .(

%. , .3

+. , 1.3/


&oss - '$a#ter 08 (*,

+y#e: Problems

2&&., 6hares of co!!on stoc of the Ti!en )o. offer an e"pected total return of 1*. The dividend is increasing at a constant * per year. 8hat is the capital gain yield9

A. , *.

=. , *.*

C. , 1.

%. , 1.*

+. , 1*.

Difficulty: asic


&oss - '$a#ter 08 (*

+y#e: Problems

2&(., The co!!on stoc of <il!ore =rands returned a 12.* rate of return last year. The dividend a!ount was @1.1 a share which euated to a dividend yield of 2.2. 8hawas the rate of price appreciation on the stoc9

A. , /.-3

=. , .3

C. , 1.&

%. , 1&./

+. , 1(.12

Difficulty: asic


&oss - '$a#ter 08 (*.

+y#e: Problems



2&*., < P % ;ndustry's co!!on stoc sells for @&3.( a share and pays an annual dividend that increases by ( annually. The !aret rate of return on this stoc is 1. 8hahe a!ount of the last dividend paid by < P %9

A. , @1.(

B. , @2.(

). , @2.1(

%. , @2.21

+. , @2.2*


&oss - '$a#ter 08 (*/

+y#e: Problems

2&-., The co!!on stoc of 6inger Fachines pays an annual dividend that is e"pected to increase by * annually. The stoc co!!ands a !aret rate of return of 11 and sefor @(&.2 a share. 8hat is the e"pected a!ount of the ne"t dividend9

A. , @2.(*

=. , @2.(

C. , @2.-1

%. , @2./&

+. , @2./-

Difficulty: asic


&oss - '$a#ter 08 (*)

+y#e: Problems

2&/., Dedline Fotors has adopted a policy of increasing the annual dividend on its co!!on stoc at a constant rate of 3.( annually. The last dividend it paid was @1.21 a sh8hat will its dividend be - years fro! now9

A. , @1.&&

=. , @1.&

C. , @1.(&

%. , @1.(*

+. , @1.(/

Difficulty: asic


&oss - '$a#ter 08 (*8+y#e: Problems



2&., >ou have decided that you would lie to own so!e shares of Fartin P Filler #FPF$ but need an e"pected 1( rate of return to co!pensate for the perceived ris of sownership. 8hat is the !a"i!u! you are willing to spend today to buy one share of FPF stoc if the co!pany pays a constant @3 annual dividend per share9

A. , @1(.

=. , @1*.2(

). , @1-.(

%. , @1/.-(

E. , @2.


&oss - '$a#ter 08 (*

+y#e: Problems

2(., %eltona Ko!es co!!on stoc sells for @(2.*& a share. The total return is 11.3. The co!pany Hust paid their annual dividend of @2.1. 8hat is the dividend growth rat

A. , *.(-

B. , -.3

). , -./

%. , -.2-

+. , -.31

Difficulty: asic


&oss - '$a#ter 08 (*.0

+y#e: Problems

2(1., Killtop Farets will pay an annual dividend of @2.-3 a share on its co!!on stoc ne"t wee. Last year, the co!pany paid a dividend of @2.* a share. The co!panyadheres to a constant rate of growth dividend policy. 8hat will one share of =PO co!!on stoc be worth ( years fro! now if the applicable discount rate is .(9

A. , @--.&3

=. , @-/.-

). , @-.

%. , @-.*-

+. , @/1.3

Difficulty: asic


&oss - '$a#ter 08 (*.1

+y#e: Problems



2(2., eterson urseries Hust paid a @3.2 annual dividend. The co!pany has a policy whereby the dividend increases by 3 annually. >ou would lie to purchase 1 sharestoc in this fir! but realize that you will not have the funds to do so for another two years. ;f you desire a 12 rate of return, how !uch should you e"pect to pay for 1 sh

when you can afford to buy this stoc9

A. , @3,&*/

=. , @3,--2

C. , @3,//(

%. , @&,11

+. , @&,22(

Difficulty: asic


&oss - '$a#ter 08 (*.*

+y#e: Problems

2(3., Faster Technicians Hust announced that it is increasing its annual dividend to @& and establishing a policy whereby the dividend will increase by 2 annually thereafter.Kow !uch will one share of this stoc be worth 1 years fro! now if the reuired rate of return is 1&9

A. , @3./3

B. , @&.*3

). , @&.*-

%. , @&1.&&

+. , @&1.&-

Difficulty: asic


&oss - '$a#ter 08 (*.,+y#e: Problems

2(&., 6hares of =lecwell De!odelers co!!on stoc are currently selling for @32.( a share. The last annual dividend paid was @2.2( per share. The !aret rate of return is At what rate is the dividend growing9

A. , *.*2

=. , *./&

). , -.*

%. , -.13

+. , -.2(

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*.

+y#e: Problems



2((., Fassey Fotors is a new fir! in a rapidly growing industry. The co!pany is planning on increasing its annual dividend by 1 a year for the ne"t 3 years and thendecreasing the growth rate to & per year. The co!pany Hust paid its annual dividend in the a!ount of @1. per share. 8hat is the current value of one share of this stoc if teuired rate of return is 13.-(9

A. , @12./

=. , @12.21

). , @12.2*

%. , @12.3-

E. , @12.&(



&oss - '$a#ter 08 (*..

+y#e: Problems

2(*., Oettle Oorn, ;nc. Hust paid a @1.& per share annual dividend. The co!pany is planning on paying @1.(, @1.*(, @1., and @2. a share over the ne"t & years, respectiveAfter that, the dividend will be a constant @2.2( per share per year. 8hat is the !aret price of this stoc if the !aret rate of return is 129

A. , @1(.&-

=. , @1*./

). , @1*.*-

D. , @1-.1

+. , @1-.*



&oss - '$a#ter 08 (*./ +y#e: Problems

2(-., The 6ister's Faret is preparing to pay its first dividends. ;t is going to pay @.*, @1.1, and @1.( a share over the ne"t 3 years, respectively. After that, the co!pany hatated that the annual dividend will be @1./ per share indefinitely. 8hat is this stoc worth to you per share if you de!and a rate of return9

A. , @1/.22

=. , @1/.*(

). , @1./

D. , @1.*2

+. , @2.11


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*.)

+y#e: Problems



2(/., 8inter Green %ecors announced today that it will begin paying annual dividends. The first dividend will be paid ne"t year in the a!ount of @.& a share. The followingdividends will be @.*, @./(, and @1. a share annually for the following 3 years, respectively. After that, dividends are proHected to increase by 2 per year. Kow !uch are ywilling to pay to buy one share of this stoc today if your desired rate of return is 19

A. , @1.-

B. , @1./

). , @11.11

%. , @11.1-

+. , @11.23



&oss - '$a#ter 08 (*.8

+y#e: Problems

2(., =ershire Ko!es recently paid @2.2 as an annual dividend. <uture dividends are proHected at @2.3, @2.(, and @2.-( over the ne"t 3 years, respectively. =eginning fouyears fro! now, the dividend is e"pected to increase by 3 annually. 8hat is one share of this stoc worth to you today if you reuire an 11 rate of return9

A. , @32.

=. , @32.*

). , @3&.1&

%. , @3&./*

+. , @3(.(2



&oss - '$a#ter 08 (*.+y#e: Problems

2*., Dosebud <lorists pays a constant dividend of @1.( a share. The co!pany announced today that it will continue to do this for another 2 years after which ti!e it willdiscontinue paying dividends per!anently. 8hat is one share of this stoc worth today if the reuired rate of return is -.(9

A. , @2.&(

=. , @2.((

C. , @2.*

%. , @2.-

+. , @3.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*/0

+y#e: Problems



2*1., MPM Tools pays no dividend at the present ti!e. The co!pany plans to start paying an annual dividend in the a!ount of @.2( a share for 3 years co!!encing ne"t year. he 3 years, the co!pany plans on paying a constant @1 a share dividend indefinitely. Kow !uch are you willing to pay to buy a share of this stoc if your reuired return is 1

A. , @&.-2

=. , @&.

). , @(.&(

D. , @(.2

+. , @*.3(


&oss - '$a#ter 08 (*/1

+y#e: Problems

2*2., Fain 6treet Tool P %ie is in a downsizing !ode. The co!pany paid a @2 annual dividend last year. The co!pany has announced plans to lower the dividend by @.( a ?nce the dividend a!ount beco!es zero, the co!pany will cease all dividends per!anently. >ou place a reuired rate of return of 1/ on this particular stoc given theco!pany's situation. 8hat is one share of this stoc worth to you today9

A. , @2.2

=. , @2.&-

). , @2.*/

%. , @2.-2

+. , @2./3



&oss - '$a#ter 08 (*/*+y#e: Problems

2*3., %aily Fovers is a relatively new fir!. The co!pany paid its first annual dividend yesterday in the a!ount of @.& a share. The co!pany plans to double each annualdividend pay!ent for the ne"t 2 years. After that ti!e, it is planning on paying a constant @2 per share indefinitely. 8hat is one share of this stoc worth today if the !aret rof return on si!ilar securities is 1&.(9

A. , @12.1-

B. , @12.&&

). , @12.*/

%. , @12./&

+. , @12./-


&oss - '$a#ter 08 (*/,

+y#e: Problems



2*&., Last wee, PF Dailroad paid its annual dividend of @1.( per share. The co!pany has been reducing the dividends by 1 each year. Kow !uch are you willing to po purchase stoc in this co!pany if your reuired rate of return is 1(9

A. , @(.&

=. , @*.

). , @1(.*

%. , @2-.

+. , @3.3


&oss - '$a#ter 08 (*/

+y#e: Problems

2*(., u +lectronics is e"pecting a period of intense growth. Thus, the co!pany has decided to retain !ore of its earnings to help finance the growth. As a result, the co!pangoing to reduce the annual dividend by 2( a year for the ne"t 2 years. After that, it will !aintain a constant dividend of @.( a share. Last year, the co!pany paid @2 per sha8hat is the !aret value of this stoc if the reuired rate of return is 1&9

A. , @3.-

=. , @&.1

). , @&.32

D. , @&.3

+. , @(.*2

Difficulty: asic


&oss - '$a#ter 08 (*/.+y#e: Problems

2**., )onfectioners' )orner wants to offer so!e preferred stoc that pays an annual dividend of @&.( a share. The co!pany has deter!ined that stocs with si!ilarcharacteristics provide an 11 rate of return. 8hat price should )onfectioner's e"pect to receive per share for this stoc offering9

A. , @3/./-

=. , @&.(&

C. , @&.1

%. , @&(.(

+. , @&.(

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*//

+y#e: Problems



2*-., The preferred stoc of %eep 6outh ies pays an annual dividend of @1.& and sells for @1/.2 a share. 8hat is the rate of return on this security9

A. , *.*-

B. , -.*

). , .(

%. , 1.33

+. , 13.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*/)

+y#e: Problems

2*/., Allison owns shares of =aewell preferred stoc, which she says provides her with a constant .( rate of return. The stoc is currently priced at @&2.1 a share. 8hat ia!ount of the dividend per share9

A. , @&.

=. , @&.2(

). , @&.&3

%. , @&.(

+. , @&.*1

Difficulty: asic


&oss - '$a#ter 08 (*/8

+y#e: Problems

2*., Gerold's Travel 6ervice Hust paid @1.- to its shareholders as the annual dividend. 6i!ultaneously, the co!pany announced that future dividends will be increasing by 3f you reuire a 1.( rate of return, how !uch are you willing to pay to purchase one share of this stoc9

A. , @1-.(

=. , @2.*&

). , @2&./

%. , @2&.(2

E. , @2(.31

Difficulty: asic


&oss - '$a#ter 08 (*/

+y#e: Problems



2-., Messica's har!acy !ade two announce!ents concerning their co!!on stoc today. <irst, the co!pany announced the ne"t annual dividend will be @1.&/ a share. 6econall dividends after that will increase by 2.( annually. 8hat is the !a"i!u! a!ount you should pay to purchase a share of this stoc if your goal is to earn a 12 rate of retu

A. , @12.33

=. , @12.*&

). , @13.2-

D. , @1(.(/

+. , @1(.-

Difficulty: asic


&oss - '$a#ter 08 (*)0

+y#e: Problems

2-1., Kow !uch are you willing to pay for one share of %elphia stoc if the co!pany Hust paid a @1.3& annual dividend, the dividends increase by 2./ annually, and you rea 1& rate of return9

A. , @./&

=. , @11.*

C. , @12.3

%. , @12.

+. , @13.*1

Difficulty: asic


&oss - '$a#ter 08 (*)1

+y#e: Problems

2-2., Te"tile ;!porters paid a @1.* per share annual dividend last wee. %ividends are e"pected to increase by & annually. 8hat is one share of this stoc worth to you todyour reuired rate of return is 13.(9

A. , @1*./&

B. , @1-.(2

). , @1.23

%. , @1./-

+. , @2.(

Difficulty: asic


&oss - '$a#ter 08 (*)*+y#e: Problems



2-3., +legante Ko!es stoc traditionally provides a 1* rate of return. The co!pany Hust paid an annual dividend of @3.2 a share and is e"pected to increase that a!ount byper year. ;f you are planning to buy 1, shares of this stoc ne"t year, how !uch should you e"pect to pay per share if the !aret rate of return for this type of security is he ti!e of your purchase9

A. , @3.((

=. , @32.-

). , @*-.2

%. , @/.

E. , @//.2

Difficulty: asic


&oss - '$a#ter 08 (*),

+y#e: Problems

2-&., The Good Life offers a co!!on stoc that pays an annual dividend of @2 a share. The co!pany has pro!ised to !aintain a constant dividend. Kow !uch are you willinpay for one share of this stoc if you want to earn a return on your euity invest!ents9

A. , @22.22

=. , @2&.22

). , @2*.*-

%. , @2/.(-

+. , @31.1&

Difficulty: asic


&oss - '$a#ter 08 (*)

+y#e: Problems



2-(., The Dow =oat has paid annual dividends of @.&/, @.*, and @.*2 a share over the past three years, respectively. The co!pany now predicts that it will !aintain a consdividend since its business has leveled off and sales are e"pected to re!ain relatively constant. Given the lac of future growth, you will only buy this stoc if you can earn ateast a 1& rate of return. 8hat is the !a"i!u! a!ount you are willing to pay for one share of this stoc today9

A. , @3.&3

=. , @&.2

C. , @&.&3

%. , @(.(

+. , @(.*



&oss - '$a#ter 08 (*).+y#e: Problems

2-*., The co!!on stoc of =M's Auto )linic sells for @3/.2( a share. The stoc is e"pected to pay @1. per share ne"t !onth when the annual dividend is distributed. =M's haestablished a pattern of increasing their dividends by 2.( annually and e"pects to continue doing so. 8hat is the !aret rate of return on this stoc9

A. , &.&1

=. , &.-

). , -.3/

D. , -.&-

+. , -.(


&oss - '$a#ter 08 (*)/

+y#e: Problems

2--., The current yield on Fartin's Fills co!!on stoc is 3.*. The co!pany Hust paid a @1./ dividend and plans to pay @1./* ne"t year. The dividend growth rate is e"peco re!ain constant at the current level. 8hat is the reuired rate of return on this stoc9

A. , 3.-2

=. , &./

). , (.*

%. , *.3

E. , -.(



&oss - '$a#ter 08 (*))

+y#e: Problems



2-/., Lae 6hore Jineyards recently paid a @&.2 annual dividend on their co!!on stoc. This dividend increases at an average rate of &.2 per year. The stoc is currentlyelling for @/.*( a share. 8hat is the !aret rate of return9

A. , (.21

=. , (.&3

). , (.*-

%. , .&1

E. , .*3


&oss - '$a#ter 08 (*)8

+y#e: Problems

2-., 6hares of co!!on stoc of the 8indy <ar!s offer an e"pected total return of 13./. The dividend is increasing at a constant &.2 per year. 8hat is the dividend yield9

A. , /.-

B. , .*

). , 12.2

%. , 1(.(

+. , 1/.

%ividend yield B .13/ 5 .&2 B .*



&oss - '$a#ter 08 (*)

+y#e: Problems

2/., The co!!on stoc of Mesup's returned a nifty 2&.* rate of return last year. The dividend a!ount was @.& a share which euated to a dividend yield of .*. 8hat whe rate of price appreciation for the year9

A. , 1/.*

B. , 2&.

). , 2&.*

%. , 2(.2

+. , 3.*

g B .2&* 5 .* B .2& B 2&.



&oss - '$a#ter 08 (*80

+y#e: Problems



2/1., DT<, ;nc. co!!on stoc sells for @22 a share and pays an annual dividend that increases by 3./ annually. The !aret rate of return on this stoc is /.2. 8hat is thea!ount of the last dividend paid9

A. , @.//

=. , @.

C. , @.3

%. , @.-

+. , @1.



&oss - '$a#ter 08 (*81

+y#e: Problems

2/2., The Ko!e Faret has adopted a policy of increasing the annual dividend on their co!!on stoc at a constant rate of 3.-( annually. The fir! is paying an annual diviof @1.1 today. 8hat will the dividend be five years fro! now9

A. , @1.1*

=. , @1.2-

C. , @1.32

%. , @1.3-

+. , @1.&(

%( B @1.1 E #1.3-($( B @1.32



&oss - '$a#ter 08 (*8*

+y#e: Problems

2/3., >ou have decided you would lie to own so!e shares of the )lean )oal )o!pany but need a 1* rate of return to co!pensate for the perceived ris of such ownership8hat is the !a"i!u! you are willing to spend per share to buy this stoc if the co!pany pays a constant @1.-( annual dividend per share9

A. , @.1

B. , @1.&

). , @12.*

%. , @1/.*

+. , @22./1


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*8,

+y#e: Problems



2/&., The Kerb Garden co!!on stoc sells for @&3.- a share and has a !aret rate of return of 11.*. The co!pany Hust paid an annual dividend of @1.&2 per share. 8hat idividend growth rate9

A. , (.32

=. , (.-3

). , -./2

D. , /.

+. , /.1&



&oss - '$a#ter 08 (*8

+y#e: Problems

2/(., O= Adventures will pay an annual dividend of @3.1( a share on their co!!on stoc ne"t wee. Last year, the co!pany paid a dividend of @3. a share. The co!panyadheres to a constant rate of growth dividend policy. 8hat will one share of this co!!on stoc be worth ten years fro! now if the applicable discount rate is 12.(9

A. , @&2.

=. , @(*.-/

). , @*(.1*

D. , @*/.&1

+. , @-1./3



&oss - '$a#ter 08 (*8.

+y#e: Problems



2/*., To!'s Kealth )linic Hust paid a @&.& annual dividend. The co!pany has a policy of increasing the dividend by & annually. >ou would lie to purchase 1 shares of sn this fir! but realize that you will not have the funds to do so for another two years. ;f you reuire a 1& rate of return, how !uch will you be willing to pay for the 1 sha

when you can afford to !ae this invest!ent9

A. , @&,&

B. , @&,&

). , @&,(-*

%. , @&,*-&

+. , @&,-(

urchase cost B 1 E @&.& B @&,&



&oss - '$a#ter 08 (*8/

+y#e: Problems

2/-., <rantown Feats Hust announced that they are increasing the annual dividend to @1.-( and establishing a policy whereby the dividend will increase by 2 annually

hereafter. Kow !uch will one share of this stoc be worth si" years fro! now if the reuired rate of return is 1&.(9

A. , @1&.

=. , @1&.2/

). , @1&./&

D. , @1(.--

+. , @1*./



&oss - '$a#ter 08 (*8)

+y#e: Problems



2//., 6hares of %o aught co!!on stoc are currently selling for @&*.. The last dividend paid was @2.21 per share and the !aret rate of return is 1(./. At what rate is thdividend growing9

A. , -.*

=. , .-3

C. , 1.(

%. , 11.

+. , 11.3


&oss - '$a#ter 08 (*88

+y#e: Problems

2/., )ellular Tal is a new fir! in a rapidly growing industry. The co!pany is planning on increasing its annual dividend by 2( a year for the ne"t three years and thendecreasing the growth rate to * per year. The co!pany Hust paid its annual dividend in the a!ount of @./ per share. 8hat is the current value of one share of this stoc if t

euired rate of return is 1-9

A. , @11.1-

B. , @12.1&

). , @12.&

%. , @1&.2-

+. , @1(.*

%ividends for the ne"t 3 years are: @1., @1.2(, and @1.(*2(.



&oss - '$a#ter 08 (*8+y#e: Problems



2., MPM +"porters paid a @1./ per share annual dividend last !onth. The co!pany is planning on paying @2., @2.(, @2.-(, and @3. a share over the ne"t four years,espectively. After that the dividend will be constant at @3.2 per share per year. 8hat is the !aret price of this stoc if the !aret rate of return is 139

A. , @-.&-

=. , @1(.*

). , @2.-3

D. , @22.(-

+. , @2&.3-



&oss - '$a#ter 08 (*0

+y#e: Problems

21., The 6li! 8aist announced today that they will begin paying annual dividends. The first dividend will be paid ne"t year in the a!ount of @.3( a share. The followingdividends will be @.&, @.((, and @.- a share annually for the following three years, respectively. After that, dividends are proHected to increase by 2.( per year. Kow !uch you willing to pay to buy one share of this stoc if your desired rate of return is 129

A. , @(.&-

=. , @(./2

). , @(.2

%. , @*.3

E. , @*.2-


&oss - '$a#ter 08 (*1

+y#e: Problems



22., Gloria's =outiue of ?ttawa recently paid @1.*( as an annual dividend. <uture dividends are proHected at @1.*/, @1.-2, @1.-*, and @1./ over the ne"t four years,espectively. =eginning five years fro! now, the dividend is e"pected to increase by 2.( annually. 8hat is one share of this stoc worth to you if you reuire an 11 rate oeturn on si!ilar invest!ents9

A. , @1/.&

B. , @1.*/

). , @21.33

%. , @2&.33

+. , @2(.



&oss - '$a#ter 08 (**+y#e: Problems

23., =liley lu!bers pays no dividend at the present ti!e. The co!pany plans to start paying an annual dividend in the a!ount of @.2 a share for three years co!!encinghree years fro! today. After that ti!e, the co!pany plans on paying a constant @1 a share dividend indefinitely. Kow !uch are you willing to pay to buy a share of this stoc

your reuired return is 1(9

A. , @3.**

=. , @3.&

). , @&.3-

%. , @&.-1

+. , @&./&


&oss - '$a#ter 08 (*,

+y#e: Problems



2&., 6i!plicity is a relatively new fir! that appears to be on the road to great success. The co!pany paid their first annual dividend yesterday in the a!ount of @.1( a shareThe co!pany plans to double each annual dividend pay!ent for the ne"t four years. After that ti!e, they are planning on paying a constant dividend of @2.( per sharendefinitely. 8hat is one share of this stoc worth today if the !aret rate of return on si!ilar securities is 13.&(9

A. , @12.32

=. , @12.--

). , @13.--

D. , @1&.22

+. , @1&.3-


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (*

+y#e: Problems

2(., Ko!e =uilders, ;nc. is a very cyclical type of business which is reflected in their dividend policy. The fir! pays a @3.( per share dividend every other year. The lastdividend was paid last year. <our years fro! now, the co!pany plans to pay a @-- liuidating dividend per share. 8hat is the current !aret value of this stoc if the !aret of return is 1/.(9

A. , @&1.(&

=. , @&3.32

C. , @&&.11

%. , @&*.(

+. , @&/.3-



&oss - '$a#ter 08 (*.

+y#e: Problems



2*., 6uper 6ounds is e"pecting a period of intense growth and has decided to retain !ore of their earnings to help finance that growth. As a result, they are going to reduce thannual dividend by 2 a year for the ne"t three years. After that they will !aintain a constant dividend of @1 a share. Last year, the co!pany paid @2.2( as the annual divideper share. 8hat is the !aret value of this stoc if the reuired rate of return is 1*9

A. , @*.*3

B. , @-.3*

). , @/./

%. , @.*1

+. , @11.23



&oss - '$a#ter 08 (*/ +y#e: Problems

2-., 6hirley's )ool Treats is e"pecting their ice crea! sales to decline due to the increased interest in healthy eating. Thus, the co!pany has announced that they will be redu

heir annual dividend by & a year for the ne"t four years. After that, they will !aintain a constant dividend of @1 a share. Last year, the co!pany paid @1./ per share. 8hathis stoc worth to you if you reuire a 12 rate of return9

A. , @.2

B. , @1.2-

). , @11.3

%. , @12.-

+. , @13.1


&oss - '$a#ter 08 (*)

+y#e: Problems



2/., The preferred stoc of 8est )oast Li!ited pays an annual dividend of @(.( and sells for @(2 a share. 8hat is the rate of return on this security9

A. , .&(

=. , ./3

). , 1.&/

D. , 1.(/

+. , 1.--

D B @(.(4@(2. B 1.(/

Difficulty: asic


+y#e: Problems

2., 6tu owns shares of Farley preferred stoc which he says provides hi! with a constant 13.* rate of return. The stoc is currently priced at @(1.&- a share. 8hat is thea!ount of the dividend per share9

A. , @2.*&

=. , @3.-/

). , @(./(

%. , @*.2*

E. , @-.

% B .13* E @(1.&- B @-.

Difficulty: asic


&oss - '$a#ter 08 (*

+y#e: Problems

3., 6tocs are different fro! bonds because .

A. , 6tocs, unlie bonds, are !aHor sources of funds.

B. , 6tocs, unlie bonds, represent residual ownership.

). , 6tocs, unlie bonds, give owners legal clai!s to pay!ents.

%. , =onds, unlie stocs, represent voting ownership.

+. , =onds pay dividends.



&oss - '$a#ter 08 (,00

+y#e: 'once#ts

31., A characteristic of public corporations is to allocate a portion of their earnings to shareholders through .

A. , 6toc splits.

B. , )ash dividends.

). , et ;nco!e.

%. , 6toc dividends.

+. , 6toc liuidation.





&oss - '$a#ter 08 (,01+y#e: 'once#ts

32., >ou want to invest in a stoc that pays @*. annual cash dividends for the ne"t five years. At the end of the five years, you will sell the stoc for @3.. ;f you want to on this invest!ent, what is a fair price for this stoc if you buy it today9

A. , @&1.3-

=. , @&.3-

). , @22.-(

%. , @1/.*3

+. , @1*.((



&oss - '$a#ter 08 (,0*+y#e: Problems



33., Owa Fotors ;nc. pays uarterly dividends of @2. dividend and will !aintain this policy forever. 8hat price should you pay for one share of preferred stoc if you waan annual return of .( on your invest!ent9

A. , @-/.21

=. , @/.21

C. , @/&.21

%. , @//.21

+. , @2.21



&oss - '$a#ter 08 (,0,

+y#e: Problems

3&., The ne"t dividend is e"pected to be @1./, growth rate is *, and the reuired rate of return is 13. 8hat is the stoc price9

A. , @3(./1

=. , @3./3

C. , @2(.-1

%. , @2.13

+. , @1(.(1



&oss - '$a#ter 08 (,0

+y#e: Problems



3(., 6edge ;nc. has a 12 reuired rate of return. ;t does not e"pect to pay dividends for seven years. At the end of year /, it will pay @2. per share in dividends. At that ti!6edgwic e"pects its dividends to grow at - forever. )alculate the stoc price now.

A. , @&&./

=. , @33.&

). , @31.2

%. , @3.

+. , @2./


&oss - '$a#ter 08 (,0.+y#e: Problems

3*., %ividend !odels suggest that deter!ine the value of a financial asset to which the owner is entitled while holding the asset.

A. , )urrent cash flows.

=. , ast cash flows.

C. , <uture cash flows.

%. , ast and present cash flows.

+. , ast and future cash flows.



&oss - '$a#ter 08 (,0/

+y#e: 'once#ts



3-., Tarp )orporation is a young start5up co!pany. o dividends will be paid over the ne"t ten years because the fir! needs to plow bac its earnings to fuel growth. Theco!pany will pay @3 per share dividend in year 11 and will increase the dividend by * per year thereafter. ;f the reuired return on this stoc is 1(, what is the current shaprice9

A. , @-.2&

=. , @-.(&

). , @-./&

%. , @/.&

E. , @/.2&



&oss - '$a#ter 08 (,0)

+y#e: Problems



3/., )ity )orp. is e"periencing rapid growth. %ividends are e"pected to grow at 2 per year during the ne"t three years, 1 over the following year, and then & per yeandefinitely. The reuired return on this stoc is 1. 8hat is the proHected stoc price for the co!ing year, if it Hust paid a @2 dividend9

A. , @21.&&

=. , @32.((

). , @&3.**

D. , @(&.--

+. , @*(.//


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (,08

+y#e: Problems



3., )hahal )orporation is e"pected to pay dividends of @12, @, @*, and @3 over the ne"t four years. The co!pany plans to !aintain a constant & growth rate in dividendsafterwards. ;f the reuired return on the stoc is 11, what is the current share price9

A. , @&3./&

=. , @&-.&

). , @(1.&&

D. , @(3./&

+. , @((.2&


Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (,0

+y#e: Problems



31., Koldo! )orporation's ne"t dividend will be @2.&( per share. The co!pany will increase its dividend 2 the year after and will then reduce its dividend growth rate bypercentage points per year until it reaches the industry average of ( dividend growth, after which the co!pany will eep a constant growth rate forever. ;f the reuired returnvestors is 11, what will a share of stoc sell for today9

A. , @(.&/

B. , @(2.3

). , @(&.2

%. , @(*.11

+. , @(/.2



&oss - '$a#ter 08 (,10

+y#e: Problems



311., anTech )orporation's ne"t dividend is e"pected to be @1.-(. %ividend growth has been a consistent - per year. ;f investors want a 12 return, deter!ine the stoc pr( years ago.

A. , @2&.(

=. , @2(.((

). , @2*.(

%. , @2*.(

+. , @2-.((



&oss - '$a#ter 08 (,11

+y#e: Problems

312., Talon )orp. Hust paid a dividend of @1.( per share. The dividends are e"pected to grow at 2 for the ne"t eight years and then level off to a ( growth rate indefinitehe reuired return is 12, what is the price of the stoc today9

A. , @22.

B. , @22.(

). , @23.

%. , @23.(

+. , @2&.


&oss - '$a#ter 08 (,1*

+y#e: Problems



313., Talon )orp. Hust paid a dividend of @1.( per share. The dividends have been growing at ( per year. ;f the reuired return is 12, what was the price of the stoc threeyears ago9

A. , @1(./&

=. , @1*.-&

). , @1-.*&

%. , @1/.(&

E. , @1.&&



&oss - '$a#ter 08 (,1,

+y#e: Problems



31&., Koldo! )orporation's ne"t dividend will be @2.&( per share. The co!pany will increase its dividend 2 the year after and will then reduce its dividend growth rate bypercentage points per year until it reaches the industry average of ( dividend growth, after which the co!pany will eep a constant growth rate forever. ;f the reuired returnvestors is 11, what will a share of stoc sin year 29

A. , @(-./

B. , @(/./

). , @(.1*

%. , @*.*3

+. , @*1.&(



&oss - '$a#ter 08 (,1+y#e: Problems

31(., List and briefly e"plain the three special cases in which we can co!e up with a value for a share of stoc.

The three cases are: zero growth, constant growth, and cases where the dividend grows at a constant rate after so!e length of ti!e. The zero growth case is a si!ple perpetuithe constant growth case is a straightforward application of the dividend growth !odel, and the third case reuires using the non5constant dividend growth !odel.


&oss - '$a#ter 08 (,1.

+y#e: 3ssay



31*., )onsider a share of stoc 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 ( per year thereafthe reuired return is 1, we can value this share of stoc by finding 2 using %3, then find B %14#1.1$ C %24#1.1$2 C 24#1.1$1. ;n this for!ula, it appears as though we igno

dividends fro! year three on. 8hy is this so9

8e actually don't ignore any dividends. 8hen we co!pute # 2 we incorporate dividend nu!ber three, but also all dividends fro! that point forward$ Thus, we have included dividends in the stoc valuation, which is reuired in order to deter!ine the value of a share.

Difficulty: asic

Learning Objective: 08-01 o! stoc" #rices de#end on future dividends and dividend gro!t$%&oss - '$a#ter 08 (,1/

+y#e: 3ssay

31-., 8hat are the co!ponents of the reuired rate of return on a share of stoc9 =riefly e"plain each.

The two co!ponents are dividend yield, which !easures the annual percentage inco!e return on the stoc, and the capital gains yield, which is the percentage price appreciator depreciation$ of the stoc.

Difficulty: asic


&oss - '$a#ter 08 (,1)

+y#e: 3ssay

31/., =riefly e"plain the differences between preferred and co!!on stoc.

)o!!on stocholders have the right to vote on corporate !atters and have the right to receive the residual value of the fir! after all liabilities and preferred stocholders are n a liuidation. referred stocholders have a pro!ised dividend, !ay or !ay not have the right to collect dividends that have been passed, and preferred stoc will typically ated !uch lie bonds. ;n a liuidation, preferred shareholders have a preference over co!!on stocholders.

Difficulty: asic


&oss - '$a#ter 08 (,18

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31., +"plain whether it is easier to find the reuired return on a publicly traded stoc or a publicly traded bond, and e"plain why9

=onds, unlie stocs, have a final !aturity date and pro!ised pay!ents at fi"ed periods of ti!e. <or stocs, the only valuation !odel we have up to this point in the te"t is th

dividend growth !odel which reuires esti!ation of a dividend growth rate and also reuires that certain conditions be !et before the dividend growth !odel can be applied.or!ally, all of the infor!ation reuired to find the yield on a publicly traded bond is publicly available while only the price and !ost current dividend are available for stoc

Difficulty: asic


&oss - '$a#ter 08 (,1

+y#e: 3ssay

32., A nu!ber of publicly traded fir!s pay no dividends yet investors are willing to buy shares in these fir!s. Kow is this possible9 %oes this violate our basic principle of svaluation9 +"plain9

?ur basic principle of stoc valuation is that the value of a share of stoc is si!ply eual to the present value of all of the e"pected dividends on the stoc. According to thedividend growth !odel, an asset that has no e"pected cash flows has a value of zero, so if investors are willing to purchase shares of stoc in fir!s that pay no dividends, theyevidently e"pect that the fir!s will begin paying dividends at so!e point in the future.



&oss - '$a#ter 08 (,*0

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321., A fir! has two classes of co!!on stoc outstanding: )lass A, which carries voting rights of 1 votes per share but receives no dividends #ever$, and )lass =, which carvoting rights of one vote per share and pays dividends whenever they are declared by the board. 8hich would you be willing to pay !ore for and why9

This is a very open5ended uestion to get the students thining about the differing interests of investors. Fanage!ent of the fir! would liely prefer )lass A while investorsnterested in dividends would liely prefer )lass = shares. The )lass = shares with their ordinary voting rights and dividends can be valued using the dividend growth !odel bhe )lass A shares, whose value is derived co!pletely fro! the voting rights, would be very difficult to value.


Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (,*1

+y#e: 3ssay

322., A fir! has co!!on and preferred stoc outstanding, both of which Hust paid a dividend of @3 per share. 8hich do you thin will have a higher share price and why9 ;f tfir! also has an issue of non5callable debentures outstanding, which do you thin investors will reuire a higher return on, the debentures or the shares of co!!on stoc9+"plain.

This uestion sets up so!e of the !aterial addressed later in the chapter. <irst, the share of co!!on stoc will be worth !ore since dividends will typically be e"pected toncrease while they will not on the preferred shares. The investor5reuired return will be higher for the stoc since bonds have pro!ised pay!ents and preference over stoc iniuidation. The astute student will !ae the connection that bondholder returns are effectively li!ited while stocholder returns are effectively not.


&oss - '$a#ter 08 (,**

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323., +"plain how supernor!al growth of dividends is possible, but only in the short5ter!.

6upernor!al growth is often associated with young, rapidly growing fir!s which have not previously paid a dividend. 8hen these fir!s begin to pay dividends, the a!ount often s!all. Therefore, it only reuires a s!all increase in the dividend a!ount to euate to a large increase in percentage ter!s. As the dividend a!ount increases, the sa!epercentage increase would cost significantly !ore in dollar ter!s. <or e"a!ple, a @.( increase to a @.1 dividend is a ( increase. <or a @2. dividend to increase by (he dividend a!ount would have to rise by @1.. ;t is a lot easier to afford a @.( increase than a @1. increase. Thus, fir!s cannot afford too !any years of supernor!al

growth.



&oss - '$a#ter 08 (,*,

+y#e: 3ssay

32&., +"plain the logic behind the dividend growth !odel.

The current value of a stoc is eual to the present value of the future inco!e derived fro! that stoc. <or stocs which pay dividends, the future inco!e strea! is !easured bhe a!ount of the ne"t dividend and the e"pected future increases in those dividends. These dividends are then discounted based on each investor's reuired rate of return to

deter!ine the present value of the stoc to that investor.

Difficulty: asic


&oss - '$a#ter 08 (,*

+y#e: 3ssay

32(., +"plain why preferred stoc is si!ilar to debt.

referred stoc pays a constant a!ount, !ay be callable, !ay be convertible into co!!on stoc, !ay have a credit rating, !ay have a sining fund, and has no voting rights.These are characteristics also found in debt securities.

Difficulty: asic

Learning Objective: 08-0* +$e c$aracteristics of common and #referred stoc"s%&oss - '$a#ter 08 (,*.

+y#e: 3ssay



32*., Give an e"a!ple of a fir! which !ight offer a supernor!al dividend growth rate for a stated period of ti!e.

6tudent answers will vary but the !ost co!!on e"a!ple !ay be that of a fir! which is Hust beginning to pay dividends. The fir! !ay start with a s!all a!ount, such as @.1hare and increase the dividend at a high rate until the dividend reaches the desired long5ter! level. An increase fro! @.1 to @.1( a share is a ( increase.

Difficulty: asic


&oss - '$a#ter 08 (,*/

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/ 6u!!ary

'ategory, ( of 4uestions

%ifficulty: =asic, 22/

%ifficulty: )hallenge, -

%ifficulty: ;nter!ediate, 1

Learning ?bHective: /51 Kow stoc prices depend on future dividends and dividend growth., 2&3

Learning ?bHective: /52 The characteristics of co!!on and preferred stocs., -&

Learning ?bHective: /53 The different ways corporate directors are elected to office., 1

Learning ?bHective: /5& The stoc !aret uotations and the basics of stoc !aret reporting., /

Doss 5 )hapter /, 32

Type: )oncepts, /

Type: %efinitions, 3&

Type: +ssay, 12Type: roble!s, 1/1

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