Test bank corporate finance 8e ros chap008

Chapter 008 Stock Valuation

Multiple Choice Questions

1. The stock valuation model that determines the current stock price by dividing the next
annual dividend amount by the excess of the discount rate less the dividend growth rate is
called the _____ model.
a. zero growth
B. dividend growth
c. capital pricing
d. earnings capitalization
e. discounted dividend

SECTION: 8.1
TOPIC: DIVIDEND GROWTH MODEL
TYPE: DEFINITIONS

2. Next year's annual dividend divided by the current stock price is called the:
a. yield to maturity.
b. total yield.
C. dividend yield.
d. capital gains yield.
e. earnings yield.

SECTION: 8.1
TOPIC: DIVIDEND YIELD
TYPE: DEFINITIONS

3. The rate at which a stock's price is expected to appreciate (or depreciate) is called the
_____ yield.
a. current

b. total
c. dividend
D. capital gains
e. earnings

SECTION: 8.1
TOPIC: CAPITAL GAINS YIELD
TYPE: DEFINITIONS

8-1


Chapter 008 Stock Valuation

4. A form of equity which receives no preferential treatment in either the payment of
dividends or in bankruptcy distributions is called _____ stock.
a. dual class
b. cumulative
c. deferred
d. preferred
E. common

SECTION: 8.2
TOPIC: COMMON STOCK
TYPE: DEFINITIONS

5. The voting procedure whereby shareholders may cast all of their votes for one member of
the board is called _____ voting.
a. democratic
B. cumulative

c. straight
d. deferred
e. proxy

SECTION: 8.2
TOPIC: CUMULATIVE VOTING
TYPE: DEFINITIONS

6. The voting procedure where you must own fifty percent plus one of the outstanding shares
of stock to guarantee that you will win a seat on the board of directors is called _____ voting.
a. democratic
b. cumulative
C. straight
d. deferred
e. proxy

SECTION: 8.2
TOPIC: STRAIGHT VOTING
TYPE: DEFINITIONS

8-2


Chapter 008 Stock Valuation

7. The voting procedure where a shareholder grants authority to another individual to vote his
or her shares is called _____ voting.
a. democratic
b. cumulative
c. straight

d. deferred
E. proxy

SECTION: 8.2
TOPIC: PROXY
TYPE: DEFINITIONS

8. Payments made by a corporation to its shareholders in the form of either cash or shares of
stock are called:
a. retained earnings.
b. net income.
C. dividends.
d. redistributions.
e. infused equity.

SECTION: 8.2
TOPIC: DIVIDENDS
TYPE: DEFINITIONS

9. A _____ is a form of equity security that has a stated liquidating value.
a. bond
b. debenture
c. proxy
d. common stock
E. preferred stock

SECTION: 8.2
TOPIC: PREFERRED STOCK
TYPE: DEFINITIONS

8-3


Chapter 008 Stock Valuation

10. The market in which new securities are originally sold to investors is called the _____
market.
a. dealer
b. auction
c. over-the-counter
d. secondary
E. primary

SECTION: 8.3
TOPIC: PRIMARY MARKET
TYPE: DEFINITIONS

11. The market in which previously issued securities are traded among investors is called the
_____ market.
a. dealer
b. auction
c. over-the-counter
D. secondary
e. primary

SECTION: 8.3
TOPIC: SECONDARY MARKET
TYPE: DEFINITIONS

12. An agent who buys and sells securities from inventory is called a:

a. broker.
b. trader.
c. capitalist.
d. principal.
E. dealer.

SECTION: 8.3
TOPIC: DEALER
TYPE: DEFINITIONS

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Chapter 008 Stock Valuation

13. An agent who arranges a trade between a buyer and a seller is called a:
A. broker.
b. trader.
c. capitalist.
d. principal.
e. dealer.

SECTION: 8.3
TOPIC: BROKER
TYPE: DEFINITIONS

14. The owner of a NYSE trading license is called a(n) _____ of the exchange.
a. friend
B. member
c. agent

d. trustee
e. dealer

SECTION: 8.3
TOPIC: NYSE MEMBER
TYPE: DEFINITIONS

15. A member of the New York Stock Exchange who executes buy and sell orders from
customers once transmitted to the exchange floor is called a:
a. floor trader.
b. dealer.
c. specialist.
d. floor broker.
E. commission broker.

SECTION: 8.3
TOPIC: COMMISSION BROKER
TYPE: DEFINITIONS

8-5


Chapter 008 Stock Valuation

16. A member of the NYSE acting as a dealer in one or more securities on the exchange floor
is called a:
a. floor trader.
b. floor post.
C. specialist.
d. floor broker.

e. commission broker.

SECTION: 8.3
TOPIC: SPECIALIST
TYPE: DEFINITIONS

17. A floor broker is a NYSE member who:
a. supervises the commission brokers for a financial firm.
b. trades for his or her personal inventory.
C. executes orders on behalf of a commission broker.
d. maintains an inventory and acts on behalf of a specialist.
e. is charged with maintaining a liquid, orderly market.

SECTION: 8.3
TOPIC: FLOOR BROKER
TYPE: DEFINITIONS

18. A member of the NYSE who tries to anticipate price fluctuations and buys and sells
accordingly for his or her personal account is called a(n):
A. floor trader.
b. exchange customer.
c. specialist.
d. floor broker.
e. commission broker.

SECTION: 8.3
TOPIC: FLOOR TRADER
TYPE: DEFINITIONS

8-6

Chapter 008 Stock Valuation
19. The electronic system used by the NYSE which enables orders to be transmitted directly
to a specialist is called the _____ system.
a. NASDAQ
B. SuperDOT
c. Instinet
d. Internet
e. brokerage
SECTION: 8.3
TOPIC: SUPERDOT SYSTEM
TYPE: DEFINITIONS

20. The stream of customer buy and sell orders for securities is referred to as the:
a. paper trail.
b. trading volume.
C. order flow.
d. bid-ask spread.
e. commission trail.

SECTION: 8.3
TOPIC: ORDER FLOW
TYPE: DEFINITIONS

21. The specific location on the trading floor of the NYSE where a particular stock is traded is
commonly referred to as the:
a. spread.
b. hot spot.
c. broker's seat.

D. specialist's post.
e. DOT.

SECTION: 8.3
TOPIC: SPECIALIST'S POST
TYPE: DEFINITIONS

8-7


Chapter 008 Stock Valuation
22. A securities market primarily comprised of dealers who buy and sell for their own
inventories is generally referred to as a(n) ___ market.
a. auction
b. private
C. over-the-counter
d. regional
e. electronic network
SECTION: 8.3
TOPIC: OVER-THE-COUNTER MARKET
TYPE: DEFINITIONS

23. An ECN is best described as:
a. an electronic network which sends orders directly to the floor of the NYSE.
b. the network used in the primary market for selling newly issued shares.
c. the international trading network of the NYSE.
D. a website which allows investors to trade directly with one another.
e. a computerized network used by independent brokers.

SECTION: 8.3

TOPIC: ELECTRONIC COMMUNICATIONS NETWORK (ECN)
TYPE: DEFINITIONS

24. The inside quotes for a security are the:
a. first posted bid and ask quotes of the trading day.
b. price quotes which apply only on the floor of the exchange.
C. highest bid quote and the lowest asked quote.
d. lowest bid quote and the highest asked quote.
e. averages of all the bid and ask quotes listed in the specialist's order book.

SECTION: 8.3
TOPIC: INSIDE QUOTES
TYPE: DEFINITIONS

8-8


Chapter 008 Stock Valuation
25. The Great Northern Fish Co. pays an annual dividend of $2 per share on its common
stock. This dividend amount has been constant for the past ten years and is expected to remain
constant. Given this, one share of the firm's stock:
a. is basically worthless as it offers no growth potential.
b. has a market value equal to the present value of $2 paid one year from today.
C. is valued as if the dividend paid is a perpetuity.
d. is valued with an assumed growth rate of one percent.
e. has a market value of $2 a share.
SECTION: 8.1
TOPIC: VALUATION OF ZERO GROWTH STOCK
TYPE: CONCEPTS

26. The common stock of Ruby Janes pays a constant annual dividend. Thus, the market price
of Ruby Janes stock will:
a. also remain constant.
b. increase over time.
c. decrease over time.
d. increase when the market rate of return increases.
E. decrease when the market rate of return increases.

SECTION: 8.1
TOPIC: VALUATION OF ZERO GROWTH STOCK
TYPE: CONCEPTS

27. Billings Enterprises currently pays an annual dividend of $1.64 and plans on increasing
that amount by 4 percent each year. Chester's Fried Chicken currently pays an annual
dividend of $1.75 and plans on increasing their dividend by 3 percent annually. Given this, it
can be stated with certainty that the _____ of Billings Enterprises stock is greater than the
_____ of Chester's Fried Chicken stock.
a. market price; market price
b. dividend yield; dividend yield
C. rate of capital gain; rate of capital gain
d. total return; total return
e. capital gains; dividend yield

SECTION: 8.1
TOPIC: DIVIDEND YIELD VS. CAPITAL GAINS YIELD
TYPE: CONCEPTS

8-9

Chapter 008 Stock Valuation
28. The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. states that the market price of a stock is only affected by the amount of the dividend.
IV. considers capital gains but ignores the dividend yield.
a. I only
b. II only
c. III and IV only
D. I and II only
e. I, II, and III only
SECTION: 8.1
TOPIC: DIVIDEND GROWTH MODEL
TYPE: CONCEPTS

29. The underlying assumption of the dividend growth model is that a stock is worth:
a. the same amount to every investor regardless of the investor's desired rate of return.
B. the present value of the future cash flows which it generates.
c. an amount computed as the next annual dividend divided by the market rate of return.
d. the same amount as any other stock that pays the same current dividend and has the same
required rate of return.
e. an amount computed as the next annual dividend divided by the required rate of return.

SECTION: 8.1
TOPIC: DIVIDEND GROWTH MODEL
TYPE: CONCEPTS

30. Assume you are using the dividend growth model to value stocks. If you expect the
market rate of return to increase across the board on all equity securities, then you should also
expect the:

a. market values of all stocks to increase, all else constant.
b. market values of all stocks to remain constant as the dividend growth will offset the
increase in the market rate.
C. market values of all stocks to decrease.
d. dividend-paying stocks to maintain a constant price while non-dividend paying stocks
decrease in value.
e. dividend growth rates to increase to offset this change.

SECTION: 8.1
TOPIC: DIVIDEND GROWTH MODEL
TYPE: CONCEPTS

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Chapter 008 Stock Valuation
31. Ernie's Auto Sales is a relatively new firm that is still in a period of rapid growth. The
company plans on retaining all of its earnings for the next four years. Five years from now,
the company projects paying an annual dividend of $.20 a share and then increasing that
amount by 3.5 percent annually thereafter. To value this stock as of today, you would most
likely determine the value of the stock _____ years from today before determining today's
value.
a. 3
B. 4
c. 5
d. 6
e. 7
SECTION: 8.1
TOPIC: NONCONSTANT GROWTH
TYPE: CONCEPTS

32. Stanwycke Publishers currently pays no dividend. The company is anticipating dividends
of $0.68, $0.70, $0.85, $.90, and $1 over the next five years, respectively. After that, the
company anticipates increasing the dividend by 4 percent annually. The first step in
computing the value of this stock today is to compute the value of the stock in year:
a. 3.
b. 4.
C. 5.
d. 6.
e. 7.

SECTION: 8.1
TOPIC: NONCONSTANT GROWTH
TYPE: CONCEPTS

33. Supernormal growth refers to a firm that increases its dividend by:
a. three or more percent per year.
B. a rate which is most likely not sustainable over an extended period of time.
c. a constant rate of 2 or more percent per year.
d. $0.10 or more per year.
e. an amount in excess of $0.50 a year.

SECTION: 8.1
TOPIC: SUPERNORMAL GROWTH
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

34. The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
a. I and II only
b. I and IV only
c. II and III only
d. II and IV only
E. III and IV only

SECTION: 8.1
TOPIC: DIVIDEND YIELD AND CAPITAL GAINS
TYPE: CONCEPTS

35. The total rate of return on a stock can be positive even when the price of the stock
depreciates because of the:
a. capital appreciation.
b. interest yield.
C. dividend yield.
d. supernormal growth.
e. real rate of return.

SECTION: 8.1
TOPIC: DIVIDEND YIELD
TYPE: CONCEPTS

8-12

Chapter 008 Stock Valuation
36. The two-stage growth model evaluates the current price of a stock based on the
assumption the stock will:
a. pay an increasing dividend for a period of time and then cease paying dividends altogether.
b. increase the dividend amount every other year.
c. pay a constant dividend for the first two quarters of each year and then increase the
dividend the last two quarters of each year.
D. grow at a fixed rate for a period of time after which it will continue growing but at a
different rate.
e. pay increasing dividends for a fixed period of time, cease paying dividends for a period of
time, and then commence paying increasing dividends for an indefinite period of time.
SECTION: 8.1
TOPIC: TWO-STAGE GROWTH
TYPE: CONCEPTS

37. Which one of the following sets of dividend payments best meets the definition of twostage growth as it applies to the two-stage growth dividend model?
a. no dividends for three years, then increasing dividends forever
b. $1 per share annual dividend for five years, then $1.25 annual dividends forever
c. decreasing dividends for six years and then one final liquidating dividend payment
d. dividends payments which increase by 2, 3, 4, and 5 percent respectively for four years
followed by a constant dividend thereafter
E. dividend payments which increase by 10 percent for three years followed by dividends
which increase by 4 percent annually thereafter

SECTION: 8.1
TOPIC: DIVIDEND GROWTH MODEL
TYPE: CONCEPTS

38. Shareholders in a leveraged corporation generally have the right to:

a. select the corporate vice-presidents.
b. declare dividends.
C. elect the corporate directors.
d. issue corporate bonds.
e. obtain all the corporate assets in a bankruptcy.

SECTION: 8.2
TOPIC: SHAREHOLDER RIGHTS
TYPE: CONCEPTS

8-13


Chapter 008 Stock Valuation

39. Terri owns 45 shares of stock in Winsum Ventures and wants to win a seat on the board of
directors. Winsum Ventures has a total of 200 shares of stock outstanding. Each share
receives one vote. Presently, the company is voting to elect four new directors. Which one of
the following statements must be true given this information?
a. Regardless of the type of voting employed, Terri does not own enough shares to control any
of the seats.
b. If straight voting applies, Terri is assured one seat on the board.
c. If straight voting applies, Terri can control all the open seats.
D. If cumulative voting applies, Terri is assured one seat on the board.
e. If cumulative voting applies, Terri can control all the open seats.

SECTION: 8.2
TOPIC: CUMULATIVE VOTING
TYPE: CONCEPTS

40. Cantweiler Industries is owned by a group of shareholders who all vote independently and
who all want personal control over the firm. If straight voting is utilized, a shareholder:
A. must individually own sufficient shares to totally control the outcome of the entire election
process if he or she is to control the outcome of any one election.
b. 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 25 percent plus one of the outstanding shares.
c. must own at least two-thirds of the shares, plus one, to exercise control over the elections.
d. is only permitted to vote for one director, regardless of the number of shares owned.
e. who owns more shares than anyone else, regardless of the number of shares owned, will
control the elections.

SECTION: 8.2
TOPIC: STRAIGHT VOTING
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

41. Brownstone United has 1,000 shareholders and is preparing to elect three new board
members. You do not own enough shares to control the elections but are determined to oust
the current leadership. Likewise, no other single shareholder owns sufficient shares to
personally control the outcome of the election. The most likely result of this situation is a(n):
a. negotiated settlement where you are granted control over one of the three open positions.
b. legal battle for control of the firm based on your discontent as an individual shareholder.
c. arbitrated settlement whereby you are granted control over one of the three open positions.
d. total loss of power for you since you are a minority shareholder.
E. proxy fight for control of the firm.

SECTION: 8.2
TOPIC: PROXY VOTING
TYPE: CONCEPTS

42. Berber Mills has a capital structure which includes bonds, preferred stock, and common
stock. The firm's common stock shareholders are most to apt to have which of the following
rights?
I. right to all the corporate profits
II. sole right to elect the corporate directors
III. right to vote on proposed mergers
IV. right to the residual assets in a liquidation
a. I and II only
b. II and III only
c. I and IV only
D. II, III, and IV only
e. I, II, III, and IV

SECTION: 8.2
TOPIC: SHAREHOLDER RIGHTS
TYPE: CONCEPTS

8-15


Chapter 008 Stock Valuation

43. The Denver Post has a general dividend policy whereby the firm pays a constant annual
dividend of $1.50 per share of common stock. The firm has 2,000 shares of stock outstanding.
The company:
a. must always show a current liability of $3,000 for dividends payable.

B. must still declare each dividend before it becomes an actual company liability.
c. is obligated to continue paying $1.50 per share per year as a dividend.
d. will be declared in default and can face bankruptcy if they do not pay at least $1.50 per year
to each shareholder on a timely basis.
e. has a liability which must be paid at a later date should the company miss paying an annual
dividend payment.

SECTION: 8.2
TOPIC: DIVIDENDS
TYPE: CONCEPTS

44. The dividends paid by a corporation:
I. to an individual become taxable income of that individual.
II. reduce the taxable income of the corporation.
III. are declared by the chief financial officer of the corporation.
IV. to another corporation receive preferential tax treatment.
a. I only
B. I and IV only
c. II and III only
d. I, II, and IV only
e. I, III, and IV only

SECTION: 8.2
TOPIC: DIVIDENDS
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

45. The owner of preferred stock:
A. is entitled to a distribution of income prior to the common shareholders.
b. has the right to veto the outcome of an election held by the common shareholders.
c. has the right to declare the company bankrupt whenever there are insufficient funds to pay
dividends to the common shareholders.
d. receives tax-free dividends if they are an individual and own more than 20 percent of the
outstanding preferred shares.
e. has the right to collect payment on any unpaid dividends as long as the stock is
noncumulative preferred.

SECTION: 8.2
TOPIC: PREFERRED STOCK
TYPE: CONCEPTS

46. A 7 percent preferred stock pays a total of _____ a year in dividends per share. Assume
dividends are paid quarterly.
a. $3.50
B. $7.00
c. $14.00
d. $21.00
e. $28.00

SECTION: 8.2
TOPIC: PREFERRED STOCK
TYPE: CONCEPTS

47. Preferred shareholders are granted:
A. the right to dividends prior to common shareholders.
b. a guarantee of dividends of a set amount every quarter.

c. annual dividends equal to a set percentage of the firm's annual net income.
d. annual dividends equal to a set percentage of the preferred stock's market value.
e. the right to receive unpaid dividend payments provided the stock is noncumulative.

SECTION: 8.2
TOPIC: PREFERRED STOCK
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

48. In a liquidation, each share of 6 percent preferred stock is generally entitled to a
liquidation payment of _____ as long as there are sufficient funds available.
a. $1
b. $6
c. $10
d. $50
E. $100

SECTION: 8.2
TOPIC: PREFERRED STOCK
TYPE: CONCEPTS

49. Which of the following are correct statements concerning corporate dividends?
I. Dividends are generally treated as ordinary income for individual shareholders.
II. Dividends are a liability of a corporation only after they have been declared.
III. Dividends are a tax deductible expense once they have been paid.
IV. Dividends receive preferential treatment when they become corporate income.

a. I and II only
b. III and IV only
C. I, II, and IV only
d. II, III, and IV only
e. I, II, III, and IV

SECTION: 8.2
TOPIC: DIVIDENDS
TYPE: CONCEPTS

50. Which one of the following transactions occurs in the primary market?
a. the sale of 100 shares of Delta stock by Tami Lynn to Jennifer Lee
b. the tax-free gift of Angel stock to the Faith Church from Isaac
c. the repurchase of GP stock from Ted by Eddie
D. the initial sale of MG stock to Katie by MG Enterprises
e. the transfer of GO stock from Sue to her son, Pete

SECTION: 8.3
TOPIC: PRIMARY MARKET
TYPE: CONCEPTS

8-18


Chapter 008 Stock Valuation

51. Which one of the following statements concerning dealers and brokers is correct?
a. A dealer in market securities arranges sales between buyers and sellers for a fee.
B. A dealer in market securities pays the bid price when purchasing securities.
c. A broker in market securities earns income in the form of a bid-ask spread.

d. A broker takes ownership of the securities being traded.
e. A broker deals solely in the primary market.

SECTION: 8.3
TOPIC: DEALERS AND BROKERS
TYPE: CONCEPTS

52. The actual owners of the New York Stock Exchange are the:
a. members.
b. specialists.
c. dealers.
d. floor brokers.
E. shareholders of the NYSE Group, Inc.

SECTION: 8.3
TOPIC: NEW YORK STOCK EXHANGE
TYPE: CONCEPTS

53. Which one of the following players on the floor of the New York Stock Exchange can be
likened to part-time help in that they are called to duty only when others are fully employed?
a. floor trader
b. specialist
c. dealer
D. floor broker
e. commission broker

SECTION: 8.3
TOPIC: FLOOR BROKERS
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

54. The post is a stationary position on the floor of the New York Stock Exchange where a
_____ is assigned to work.
a. floor trader
B. specialist
c. dealer
d. floor broker
e. commission broker

SECTION: 8.3
TOPIC: SPECIALIST'S POST
TYPE: CONCEPTS

55. The closing price of a stock is quoted at 42.55, with a P/E of 18 and a net change of 0.30.
Based on this information, which one of the following statements is correct?
a. The closing price on the previous day was $0.30 higher than today's closing price.
b. A dealer will buy the stock at $42.55 and sell it at a price that is $0.30 higher, or $42.85.
C. Yesterday's closing price was $0.30 less than today's closing price.
d. The earnings per share are equal $18.
e. The earnings per share have increased by $0.30 this year.

SECTION: 8.3
TOPIC: STOCK MARKET REPORTING
TYPE: CONCEPTS

56. Which one of the following correctly applies to the NYSE?

a. The NYSE is owned by members who purchase "seats" on the exchange.
b. The assigned dealer of a particular security on the exchange is called a floor trader.
C. The NYSE is a public corporation with shares trading on the exchange floor.
d. The order flow is limited to 100 million shares per day.
e. Recently, the role of the floor broker has taken on increased significance.

SECTION: 8.3
TOPIC: NYSE
TYPE: CONCEPTS

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Chapter 008 Stock Valuation

57. The floor of the NYSE trading room:
A. includes an area commonly referred to as "the Garage".
b. is dotted with trading posts shaped as octagons.
c. consists of trading posts aligned in linear fashion around the outside walls.
d. is populated with specialists who move around the room to conduct trades.
e. is populated with floor traders carrying out trades on behalf of their firm's clients.

SECTION: 8.3
TOPIC: NYSE
TYPE: CONCEPTS

58. Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend.
Simultaneously, the company announced that future dividends will be increasing by 3.2
percent. If you require a 10.5 percent rate of return, how much are you willing to pay to
purchase one share of this stock?

a. $17.59
b. $20.64
c. $24.08
d. $24.52
E. $25.31

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

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Chapter 008 Stock Valuation

59. Jessica's Pharmacy made two announcements concerning their common stock today. First,
the company announced the next annual dividend will be $1.48 a share. Secondly, all
dividends after that will increase by 2.5 percent annually. What is the maximum amount you
should pay to purchase a share of this stock if your goal is to earn a 12 percent rate of return?
a. $12.33
b. $12.64
c. $13.27
D. $15.58
e. $15.97

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

60. How much are you willing to pay for one share of Delphia stock if the company just paid
a $1.34 annual dividend, the dividends increase by 2.8 percent annually, and you require a 14
percent rate of return?
a. $9.84
b. $11.96
C. $12.30
d. $12.99
e. $13.61

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

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Chapter 008 Stock Valuation

61. Textile Importers paid a $1.60 per share annual dividend last week. Dividends are
expected to increase by 4 percent annually. What is one share of this stock worth to you today
if your required rate of return is 13.5 percent?
a. $16.84
B. $17.52
c. $19.23
d. $19.87
e. $20.59

AACSB TOPIC: ANALYTIC

SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

62. Elegante Homes stock traditionally provides a 16 percent rate of return. The company just
paid an annual dividend of $3.20 a share and is expected to increase that amount by 5 percent
per year. If you are planning to buy 1,000 shares of this stock next year, how much should
you expect to pay per share if the market rate of return for this type of security is 9 percent at
the time of your purchase?
a. $30.55
b. $32.07
c. $67.20
d. $80.00
E. $88.20

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

8-23


Chapter 008 Stock Valuation

63. The Good Life offers a common stock that pays an annual dividend of $2 a share. The
company has promised to maintain a constant dividend. How much are you willing to pay for
one share of this stock if you want to earn a 9 percent return on your equity investments?
A. $22.22
b. $24.22

c. $26.67
d. $28.57
e. $31.14

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

64. The Row Boat has paid annual dividends of $.48, $0.60, and $0.62 a share over the past
three years, respectively. The company now predicts that it will maintain a constant dividend
since its business has leveled off and sales are expected to remain relatively constant. Given
the lack of future growth, you will only buy this stock if you can earn at least a 14 percent rate
of return. What is the maximum amount you are willing to pay for one share of this stock
today?
a. $3.43
b. $4.29
C. $4.43
d. $5.05
e. $5.60

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: STOCK VALUE
TYPE: PROBLEMS

8-24


Chapter 008 Stock Valuation

65. The common stock of BJ's Auto Clinic sells for $38.25 a share. The stock is expected to
pay $1.90 per share next month when the annual dividend is distributed. BJ's has established a
pattern of increasing their dividends by 2.5 percent annually and expects to continue doing so.
What is the market rate of return on this stock?
a. 4.41 percent
b. 4.97 percent
c. 7.38 percent
D. 7.47 percent
e. 7.59 percent

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: REQUIRED RETURN
TYPE: PROBLEMS

66. The current yield on Martin's Mills common stock is 3.6 percent. The company just paid a
$1.80 dividend and plans to pay $1.86 next year. The dividend growth rate is expected to
remain constant at the current level. What is the required rate of return on this stock?
a. 3.72 percent
b. 4.08 percent
c. 5.69 percent
d. 6.93 percent
E. 7.05 percent

AACSB TOPIC: ANALYTIC
SECTION: 8.1
TOPIC: REQUIRED RETURN
TYPE: PROBLEMS

8-25