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Exam 8: Stock Valuation

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Question 191

Multiple Choice

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A supernormal growth stock generally:

A) Is associated with a company that is experiencing rapid contraction.
B) Tends to increase its dividends per share by 30% or more for an extended number of years.
C) Has high growth dividends only for a limited number of years.
D) Has dividends that grow at a high rate for the life of the stock.
E) Is valued using the preferred stock valuation technique.

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

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Question 192

Multiple Choice

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The Zilo Corp. 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. The most likely result of this situation is a:

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.

F) D) and E)
G) B) and E)

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Question 193

True/False

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The total return on a share of stock = dividend yield + capital gains yield.

Provide a definition of straight voting.

Textile Importers paid a $1.60 per share annual dividend last week. Dividends are expected to increase by 4% annually. What is one share of this stock worth to you today if your required rate of return is 13.5%?

XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price next year.

XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price four years ago.

Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called:

Tarp Corporation is a young start-up company. No dividends will be paid over the next ten years because the firm needs to plow back its earnings to fuel growth. The company will pay $3 per share dividend in year 11 and will increase the dividend by 6% per year thereafter. If the required return on this stock is 15%, what is the current share price?

You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the ___________ model.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price into the future.

The dividend yield on a stock is the annual dividend divided by the par value.

If the required rate of return used in the dividend growth model is increased, then:

Payment of dividends is a tax deductible business expense for a corporation.

The underlying assumption of the dividend growth model is that a stock is worth:

When the constant dividend growth model holds, g = capital gains yield.

Energistics, Inc. plans to retain and reinvest all of its earnings for the next three years; at the end of year 3 the firm will pay a special dividend of $5 per share. Beginning in year 4, the firm will begin to pay a dividend of $1 per share, which is expected to grow at a 3% rate annually forever. Given a required return of 12%, the stock should sell for _____ today.

How much are you willing to pay for one share of stock if the company just paid a $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?

Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% 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.

Uptown Homes just paid a $1.60 annual dividend. This dividend is expected to increase by 3% per year. If you are planning on buying 1,000 shares of this stock one year from now, how much should you expect to pay per share if the market rate of return for this type of security is 13.5% at the time of your purchase?