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Exam 9: Share Valuation

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Question 1

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Which one of the following statements is NOT true about the general dividend valuation model?

A) The model does not assume any specific pattern for dividend growth.
B) It makes a specific assumption about when the stock is going to be sold in the future.
C) The model calls for forecasting an infinite number of dividends for a stock.
D) All of the above are true.

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Question 2

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Preferred stock with no fixed maturity can be valued as a perpetuity.

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Question 3

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Zero growth: A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.)

Constant growth: A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now?

Which one of the following statements is NOT true about broker markets?

The three simplifying assumptions that cover most stock growth patterns are

Which of the following is not a widely know stock market index?

PV of dividends: Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase?

Nonconstant growth: Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today?

Nonconstant growth: Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It then will settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock?

Zero growth: Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today?

Secondary market transactions in the United States mostly take place over the counter and not in exchanges.

Which of the following is the most typical example of a zero-growth dividend stock?

Preferred stock: Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by this firm?

The constant-growth dividend model tells us that the current price of a share of stock is the next period dividend divided by the difference between the discount rate and the dividend growth rate.

Preferred stock valuation: The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent?

Which one of the following statements is NOT true about preferred stock?

Differentiate the characteristics of common and preferred stocks.

Which of the following statements is true?

Zero growth: Metasteel Limited Co. has a stable sales track record but does not expect to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price?