Chapter 8 The Valuation and Characteristics of Stock

25) Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%?

A) $33.44

B) $55.56

C) $59.44

D) $65.87

26) Backford Company just paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth?

A) 9.47%

B) 9.89%

C) 10.87%

D) 11.81%

27) TellTrue Corporation has preferred stock which paid an annual dividend in 2009 of $5 per share. TellTrue also has common stock which paid a dividend in 2009 of $5. Which of the following statements is MOST correct concerning TellTrue stock?

A) The price of the preferred stock should equal the price of the common stock since the dividends are the same.

B) The price of the common stock could be higher than the price of the preferred stock if the common stock dividends are expected to grow in the future.

C) The price of the preferred stock is expected to be higher than the price of the common stock because the required return on preferred stock is higher than the required return on common stock.

D) If the required return on the preferred stock is the same as the required return on the common stock, then the price of preferred stock should equal the price of the common stock if markets are efficient.

28) Using the dividend valuation method, an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14. Based on this information, which of the following statements is most accurate?

A) Company B must be riskier than Company A, and risk requires a reward.

B) Other things being equal, if Company A and Company B have the same firm value, Company B must have more debt, thus leveraging its returns for the benefit of shareholders.

C) Other things being equal, if Company A and Company B have the same firm value, Company A may have more shares of stock outstanding than Company B.

D) Company B's required rate of return is higher than Company A's required return.

29) All of the following affect the value of a share of common stock EXCEPT

A) the dollar amount of the dividends.

B) investors' required rate of return.

C) the future growth rate for dividends.

D) the stock and paid-in-capital amounts on the balance sheet.

30) The Western State Company's common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?

A) $11.76

B) $24.00

C) $23.11

D) $22.22

31) An example of the growth factor in common stock is

A) acquiring a loan to fund an investment in Asia.

B) retaining profits in order to reinvest into the firm.

C) issuing new stock to provide capital for future growth.

D) two strong companies merging together to increase their economy of scale.

32) You are considering the purchase of a share of Ranch's common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. Ranch just paid a dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to pay for it now?

A) $28.57

B) $33.05

C) $20.83

D) $30.80

33) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required rate of return on this stock is 15.5%, compute the current value per share of Bensen Co. stock.

A) $81.38

B) $76.43

C) $56.23

D) $43.90

34) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock?

A) No, the market price is above the intrinsic value of the stock.

B) Yes, the market price is below the intrinsic value of the stock.

C) No, the growth rate in dividends is too far below the required return.

D) Yes, but only if you can keep the stock for at least 5 years.