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99. Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends.
100. Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares of common stock or shares of preferred stock. What should he consider before determining the type of share he should purchase?
101. Explain why small shareholders should prefer cumulative voting over straight voting.
102. Ted, a wealthy individual, plans to purchase 30 percent of a firm's Class A shares of outstanding stock. He believes that such a purchase will allow him to control the firm by electing his candidates to the board over time as current board member's terms expire. The firm has a cumulative voting process. What factors should Ted be considering and why to ensure he can gain the control he desires?
103. Explain the primary change that occurred in the structure of the NYSE in 2006 and how that change affected the exchange members.
Multiple Choice Questions
104. Jefferson Mills just paid a dividend of $1.56 per
share on its stock. The dividends are expected to grow at a constant rate of 8
percent per year, indefinitely. What will the price of this stock be in 7 years
if investors require a 15 percent rate of return?
A. $28.18
B. $32.04
C. $37.46
D. $41.25
E. $43.33
106. The Stiller Corporation will pay a $3.80 per
share dividend next year. The company pledges to increase its dividend by 2.4
percent indefinitely. How much are you willing to pay to purchase this
company's stock today if you require a 6.9 percent return on your
investment?
A. $55.07
B. $63.09
C. $72.22
D. $78.47
E. $84.44
105. The next dividend payment by Hillside Markets
will be $2.35 per share. The dividends are anticipated to maintain a 4.5
percent growth rate forever. The stock currently sells for $70 per share. What
is the dividend yield?
A. 3.20 percent
B. 3.36 percent
C. 3.54 percent
D. 4.50 percent
E. 4.81 percent
107. Suppose you know a company's stock currently
sells for $90 per share and the required return on the stock is 10 percent. You
also know that the total return on the stock is evenly divided between a
capital gains yield and a dividend yield. What is the current dividend if it's
the company's policy to always maintain a constant growth rate in its
dividends?
A. $4.18
B. $4.29
C. $4.37
D. $4.50
E. $4.64
108. Whistle Stop Trains pays a constant $16 dividend
on its stock. The company will maintain this dividend for the next 14 years and
will then cease paying dividends forever. What is the current price per share
if the required return on this stock is 15 percent?
A. $77.78
B. $82.48
C. $91.59
D. $106.67
E. $112.00
109. Morristown Industries has an issue of preferred
stock outstanding that pays a $13.25 dividend every year in perpetuity. What is
the required return if this issue currently sells for $80 per share?
A. 16.56 percent
B. 16.72 percent
C. 16.80 percent
D. 16.86 percent
E. 16.95 percent
just paid an annual dividend of $5 on its stock. The growth
rate in dividends is expected to be a constant 5 percent per year indefinitely.
Investors require a 13 percent return on the stock for the first 3 years, a 9
percent return for the next 3 years, a 7 percent return thereafter. What is the
current price per share?
A. $212.40
B. $220.54
C. $223.09
D. $226.84
E. $227.50
111. Springboro Tech is a young startup company. No
dividends will be paid on the stock over the next 15 years, because the firm
needs to plow back its earnings to fuel growth. The company will pay a $12 per
share dividend in 16 years and will increase the dividend by 3 percent per year
thereafter. What is the current share price if the required return on this
stock is 8 percent?
A. $75.66
B. $88.19
C. $120.00
D. $164.59
E. $240.00
112. Galloway, Inc. has an odd dividend policy. The
company has just paid a dividend of $7 per share and has announced that it will
increase the dividend by $2 per share for each of the next 5 years, and then
never pay another dividend. How much are you willing to pay per share today to
buy this stock if you require a 15 percent return?
A. $27.08
B. $34.15
C. $41.72
D. $42.60
E. $43.33
113. Jen's Fashions is growing quickly. Dividends are
expected to grow at a 22 percent rate for the next 3 years, with the growth
rate falling off to a constant 8 percent thereafter. The required return is 12
percent and the company just paid a $3.80 annual dividend. What is the current
share price?
A. $128.96
B. $131.11
C. $146.17
D. $148.87
E. $152.20
114. Hardwoods, Inc. is a mature manufacturing firm.
The company just paid a $10 dividend, but management expects to reduce the
payout by 9 percent each year, indefinitely. How much are you willing to pay
today per share to buy this stock if you require a 15 percent rate of
return?
A. $34.79
B. $37.92
C. $38.27
D. $41.33
E. $42.09
115. Bechtel Machinery stock currently sells for $50
per share. The market requires a 15 percent return on the firm's stock. The
company maintains a constant 8 percent growth rate in dividends. What was the
most recent annual dividend per share paid on this stock?
A. $3.00
B. $3.24
C. $3.50
D. $3.67
E. $3.91
116. Southern Utilities just issued some new preferred
stock. The issue will pay a $19 annual dividend in perpetuity beginning 9 years
from now. What is one share of this stock worth today if the market requires a
7 percent return on this investment?
A. $157.97
B. $164.16
C. $189.08
D. $241.41
E. $271.43
117. Big Falls Tours just paid a dividend of $1.55 per
share. The dividends are expected to grow at 30 percent for the next 8 years
and then level off to a 7 percent growth rate indefinitely. What is the price
of this stock today given a required return of 15 percent?
A. $67.54
B. $69.90
C. $72.47
D. $77.67
E. $78.19
118. Harvey County Choppers, Inc. is experiencing
rapid growth. The company expects dividends to grow at 25 percent per year for
the next 7 years before leveling off to 7 percent into perpetuity. The required
return on the stock is 12 percent. What is the current stock price if the
annual dividend share that was just paid was $1.05?
A. $60.15
B. $64.36
C. $67.37
D. $72.11
E. $75.19
119. Westover Winds just paid a dividend of $2.50 per
share. The company will increase its dividend by 8 percent next year and will
then reduce its dividend growth rate by 2 percentage points per year until it
reaches the industry average of 2 percent dividend growth, after which the
company will keep a constant growth rate forever. What is the price of this
stock today given a required return of 12 percent?
A. $28.42
B. $28.99
C. $31.83
D. $32.06
E. $32.47
57. What is the net present value of a project with
the following cash flows if the required rate of return is 12 percent?
58. What is the net present value of a project that
has an initial cash outflow of $34,900 and the following cash inflows? The
required return is 15.35 percent.
59. A project will produce cash inflows of $3,200 a year for 4 years
with a final cash inflow of $5,700 in year 5. The project's initial cost is
$9,500. What is the net present value of this project if the required rate of
return is 16 percent?
A. $311.02
B. $2,168.02
C. $4,650.11
D. $9,188.98
E. $21,168.02
60. You are considering the following two mutually
exclusive projects. The required rate of return is 14.6 percent for project A
and 13.8 percent for project B. Which project should you accept and why?
A. project A; because it has the higher required rate of return
B. project A; because its NPV is about $4,900 more than the NPV of project
B
C. project B; because it has the largest total cash inflow
D. project B; because it has the largest cash inflow in year one
E. project B; because it has the lower required return
61. You are considering two mutually exclusive
projects with the following cash flows. Which project(s) should you accept if
the discount rate is 8.5 percent? What if the discount rate is 13 percent?
A. accept project A as it always has the higher NPV
B. accept project B as it always has the higher NPV
C. accept A at 8.5 percent and B at 13 percent
D. accept B at 8.5 percent and A at 13 percent
E. accept B at 8.5 percent and neither at 13 percent
62. Day Interiors is considering a project with the
following cash flows. What is the IRR of this project?
A. 6.42 percent
B. 7.03 percent
C. 7.48 percent
D. 8.22 percent
E. 8.56 percent
63. An investment has the following cash flows and a
required return of 13 percent. Based on IRR, should this project be accepted?
Why or why not?
A. No; The IRR exceeds the required return by about 0.06 percent.
B. No; The IRR is less than the required return by about 0.94 percent.
C. Yes; The IRR exceeds the required return by about 0.06 percent.
D. Yes; The IRR exceeds the required return by about 0.94 percent.
E. Yes; The IRR is less than the required return by about 0.06 percent.
64. You are considering two independent projects with
the following cash flows. The required return for both projects is 16 percent.
Given this information, which one of the following statements is correct?
A. You should accept Project A and reject Project B based on their
respective NPVs.
B. You should accept Project B and reject Project A based on their
respective NPVs.
C. You should accept Project A and reject Project B based on their
respective IRRs.
D. You should accept Project B and reject Project A based on their
respective IRRs.
E. You should accept both projects based on both the NPV and IRR decision
rules.

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