Unit 9 Quiz – Flashcards
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Dividends are:
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paid out of aftertax profits.
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Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?
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Stock with a constant-growth dividend
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There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.
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straight
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When valuing a stock using the constant-growth model, D1 represents the:
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the next expected annual dividend.
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Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume each share receives one vote.
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Fifty percent of the shares plus one share
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The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?
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Dividend yield + Capital gains yield
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The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield?
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6.20 percent
g = .1167- ($2.64/$48.30) = .0620, or 6.20 percent
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A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five years, respectively. What is the average capital gains yield?
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10.14 percent
g = [($1.85 - 1.70) / $1.70 + ($2.00 - 1.85) / $1.85 + ($2.20 - 2.00) / $2.00 + ($2.50 - 2.20) / $2.20] / 4 = .1014, or 10.14 percent
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The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return?
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7.63 percent
Required return = ($1.38 /$26.90) + .025 = .0763, or 7.63 percent
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A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount?
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$5.25
Dividend = .0968 ×$54.20 = $5.25
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There are three open positions on the board of directors of XYZ Enterprises. The company has 264,000 shares of stock outstanding. Each share is entitled to one vote. How many shares of stock must you own to guarantee your personal election to the board of directors if the firm uses cumulative voting?
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66,001 shares
Shares needed = {[1/(3 + 1)] ×264,000} + 1 = 66,001
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Gilmore, Inc., just paid a dividend of $3.10 per share on its stock. The dividends are expected to grow at a constant rate of 4.25 percent per year, indefinitely. Assume investors require a return of 9 percent on this stock.
What is the current price?
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68.04 ± 1%
the constant dividend growth model is:
Pt = Dt × (1 + g) / (R - g)
So, the price of the stock today is:
P0 = D0(1 + g) / (R - g)
P0 = $3.10(1.0425) / (.09 - .0425)
P0 = $68.04
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Gilmore, Inc., just paid a dividend of $3.10 per share on its stock. The dividends are expected to grow at a constant rate of 4.25 percent per year, indefinitely. Assume investors require a return of 9 percent on this stock.
What will the price be in six years and in thirteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
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Six years $ 87.34 ± 1%
Thirteen years $116.88 ± 1%
The constant dividend growth model is:
Pt = Dt × (1 + g) / (R - g)
So, the price of the stock today is:
P0 = D0(1 + g) / (R - g)
P0 = $3.10(1.0425) / (.09 - .0425)
P0 = $68.04
The dividend at Year 7 is the dividend today times the FVIF for the growth rate in dividends and seven years, so:
P6 = D6(1 + g) / (R - g)
P6 = D0(1 + g)7 / (R - g)
P6 = $3.10(1.0425)7 / (.09 - .0425)
P6 = $87.34
We can do the same thing to find the dividend in Year 14, which gives us the price in Year 13, so:
P13 = D13(1 + g) / (R - g)
P13 = D0(1 + g)14 / (R - g)
P13 = $3.10(1.0425)14 / (.09 - .0425)
P13 = $116.88
There is another feature of the constant dividend growth model: The stock price grows at the dividend growth rate. So, if we know the stock price today, we can find the future value for any time in the future we want to calculate the stock price. In this problem, we want to know the stock price in Year 6, and we have already calculated the stock price today. The stock price in Year 6 will be:
P6 = P0(1 + g)6
P6 = $68.04(1 + .0425)6
P6 = $87.34
And the stock price in Year 13 will be:
P13 = P0(1 + g)13
P13 = $68.04(1 + .0425)13
P13 = $116.88
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The next dividend payment by Dizzle, Inc., will be $2.75 per share. The dividends are anticipated to maintain a growth rate of 7.00 percent, forever.
If the stock currently sells for $49.10 per share, what is the required return? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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Required return 12.60 correct %
We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find:
R = (D1 / P0) + g
R = ($2.75 / $49.10) + .0700
R = .1260, or 12.60%
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Wesen Corp. will pay a dividend of $2.70 next year. The company has stated that it will maintain a constant growth rate of 4.75 percent a year forever.
If you want a return of 16 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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24.00 ± 1%
Here, we need to value a stock with two different required returns. Using the constant growth model and a required return of 16 percent, the stock price today is:
P0 = D1 / (R - g)
P0 = $2.70 / (.16 - .0475)
P0 = $24.00
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Wesen Corp. will pay a dividend of $2.70 next year. The company has stated that it will maintain a constant growth rate of 4.75 percent a year forever.
If you want a return of 11 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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43.20 ± 1%
And the stock price today with a required return of 11 percent will be:
P0 = D1 / (R - g)
P0 = $2.70 / (.11 - .0475)
P0 = $43.20
