Chapter 08 Stock Valuation

1. If one uses the perpetuity model to value stock, one

assumes that P0 = P1 = . . . = , implying that the
annual return from owning the stock is zero.

True False

2. If one uses the constant growth model to value stock,

one assumes that P1 = P0 × (1 + g), P2 = P0 × (1 + g),
etc.

True False

3. According to the constant growth model, the dividend

yield is equal to the required return minus the dividend
growth rate.

True False

4. If a firm experiences a financial loss for the year, the

loss is shared equally by the debt holders and equity
holders.

True False

5. A dividend on common stock, whether declared or not,

is not a legal liability of the firm.

True False

6. For income tax purposes, preferred stock is more like

debt than it is like common stock.

True False

7. Most preferred stocks have dividends that are

cumulative.

True False

8. Dividends on preferred stock are deductible from

taxable income of the issuing firm.

True False

9. A firm must make its dividend payments to preferred

shareholders before it makes any interest payments to
its bondholders.

True False
10. The partial excludability of dividend income from
taxable income makes preferred stock less desirable to
purchasers than it might otherwise be.

True False

11. The price-earnings ratios for TSX stocks which are

listed in The National Post are based on earnings per
share for the past year.

True False

12. An asset characterized by cash flows that increase at a

constant rate forever is called a:

A.
B.
C.
D.
E.

13. The stock valuation model that determines the current

stock price as the next dividend divided by the
(discount rate less the dividend growth rate) is called
the:

A.
B.
C.
D.
E.

14. A stock's next expected dividend divided by the current

stock price is the:

A.
B.
C.
D.
E.
15. The rate at which the stock price is expected to
appreciate (or depreciate) is the:

A.
B.
C.
D.
E.

16. Equity without priority for dividends or in the event of

bankruptcy is called:

A.
B.
C.
D.
E.

17. The term __________ is usually applied to stock that

has no special preference either in paying dividends or
in bankruptcy.

A.
B.
C.
D.
E.

18. "Preemptive rights" refers to:

A.
B.
C.
D.
E.

19. Payments made by a corporation to its shareholders, in

the form of either cash, stock, or payments in kind, are
called:

A.
B.
C.
D.
E.
20. Equity with differential voting rights and/or dividend
payment claims is called:

A.
B.
C.
D.
E.

21. Equity with priority for dividends and in the event of

bankruptcy is called:

A.
B.
C.
D.
E.

22. The short alphabetic abbreviation for an exchange-

listed stock by which the issue is identified in the
market is called the stock's _____________.

A.
B.
C.
D.
E.

23. The voting procedure where shareholders may cast all

of their votes for one member of the board is:

A.
B.
C.
D.
E.

24. The voting procedure where shareholders may cast all

of their votes for each member of the board is:

A.
B.
C.
D.
E.
25. The voting procedure where shareholders grant
authority to another individual to vote their shares is
called:

A.
B.
C.
D.
E.

26. A stock whose price can be computed by dividing the

annual dividend amount by the required rate of return is
called a _______ growth stock.

A.
B.
C.
D.
E.

27. Preferred stock is a type of _______ growth stock.

A.
B.
C.
D.
E.

28. Given a price at year 5, the dividend in the dividend

growth model would be defined as:

A.
B.
C.
D.
E.

29. The capital gains yield as used in the dividend growth

model is defined as:

A.
B.
C.
D.
E.
30. The procedure which has the effect of permitting
minority participation in voting is called ____ voting.

A.
B.
C.
D.
E.

31. A cumulative dividend is defined as a dividend that is:

A.
B.
C.
D.
E.

32. Which of the following is true of non-voting common

stock?

A.
B.
C.
D.
E.

33. The required return is defined as:

A.
B.
C.
D.
E.

34. A grant of authority by a shareholder allowing for

another individual to vote his/her shares is a
_____________.

A.
B.
C.
D.
E.
35. Which of the following is a legitimate reason the
valuation of common stock is generally harder than the
valuation of bonds?

I. Future cash flows on stocks are not known in

advance.
II. Common stocks don't have a maturity date.
III. Common stock valuation is sensitive to estimates of
the dividend growth rate.

A.
B.
C.
D.
E.

36. Which of the following is true about the differences

between debt and common stock?

A.
B.
C.
D.
E.

37. 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.

A.
B.
C.
D.
E.
38. Over the past four years, a company has paid dividends
of $1.00, $1.10, $1.20, and $1.30, respectively. This
pattern is expected to continue into the future. This is an
example of a company paying a:

A.
B.
C.
D.
E.

39. 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 calculate
____________.

I. The price today.

II. The price five years from now.
III. The dividend that is expected to be paid 10 years
from now.

A.
B.
C.
D.
E.

40. Which of the following is (are) true?

I. The dividend growth model only holds if, at some

point in time, the dividend growth rate exceeds the
stock's required return.
II. A decrease in the dividend growth rate will increase
a stock's market value, all else the same.
III. An increase in the required return on a stock will
decrease its market value, all else the same.

A.
B.
C.
D.
E.
41. You are attempting to value a stock in an industry
where firms are generating exceptional dividend
growth, but this growth is expected to slow to an
equilibrium growth rate in about five years. Of the
stock valuation models studied, the most appropriate is
the _______________.

A.
B.
C.
D.
E.

42. As illustrated using the dividend growth model, the

total return on a share of common stock is comprised of
a ________________.

A.
B.
C.
D.
E.

43. Which of the following is (are) true?

I. The dividend yield on a stock is the annual dividend

divided by the par value.
II. When the constant dividend growth model holds, g =
capital gains yield.
III. The total return on a share of stock = dividend yield
+ capital gains yield.

A.
B.
C.
D.
E.

44. Given no change in required returns, the price of a

stock whose dividend is constant will:

A.
B.
C.
D.
E.
45. Assume the anticipated growth rate in dividends is
constant for Fly-By-Nite Airlines. The expected value
of the firm's stock at the end of four years (P4) is:

I. D5/(r - g)
II. P0 × (1 + g)4
III. D0 × (1 + g)/(r - g)

A.
B.
C.
D.
E.

46. You are attempting to value the shares of a new, high-

technology firm in a developing industry. You would
MOST likely:

A.
B.
C.
D.
E.

47. Which of the following common shareholder rights

kicks in when a merger is proposed?

A.
B.
C.
D.
E.

48. Which of the following is NOT usually a right of a

common stockholder?

A.
B.
C.
D.
E.
49. You just voted against a merger proposal made by
another corporation. You must own:

A.
B.
C.
D.
E.

50. As a common shareholder in a firm, which of the

following allows you to share proportionately in any
new stock sold?

A.
B.
C.
D.
E.

51. Which of the following is/are true about common stock

dividends?

I. Payment of dividends is a tax deductible business

expense for a corporation.
II. Dividends that have been declared but are not yet
paid are liabilities of the corporation.
III. Dividends received by both individuals and
corporations are fully taxable.

A.
B.
C.
D.
E.

52. Which of the following statements about dividends is

false?

A.
B.
C.
D.
E.
53. The primary reason for creating dual or multiple classes
of stock has to do with:

A.
B.
C.
D.
E.

54. Often, a firm creates a second class of stock that has

___________ as compared with the first class.

A.
B.
C.
D.
E.

55. Which of the following is NEVER a right of an owner

of a share of preferred stock?

I. The right to share proportionately in preferred

dividends paid.
II. The right to share proportionately in remaining
assets from a liquidation.
III. The right to vote for directors.

A.
B.
C.
D.
E.

56. Which of the following does NOT correctly complete

this sentence: Preferred stock is much like debt in that
______________.

A.
B.
C.
D.
E.
57. Which of the following is a true statement regarding
publicly traded stocks and bonds?

A.
B.
C.
D.
E.

58. Which of the following typically applies to preferred

stock but NOT to common stock?

A.
B.
C.
D.
E.

59. Which of the following terms is typically associated

with BOTH preferred stock and common stock?

A.
B.
C.
D.
E.

60. Which of the following is NOT a right of an owner of a

share of common stock?

A.
B.
C.
D.
E.

61. Which of the following would be considered a violation

of the rights of one or more classes of a firm's
stakeholders?

A.
B.
C.
D.
E.
62. Which of the following items does NOT usually appear
in a National Post common stock quote?

A.
B.
C.
D.
E.

63. If two stocks have the same earnings per share and
required rate of return, differences in the ____________
of the two companies can account for different stock
prices.

A.
B.
C.
D.
E.

64. ____________ can freeze out minority shareholders.

A.
B.
C.
D.
E.

65. You wish to be on the board of directors of a company.

If you wish to buy as low a percentage of the total
outstanding shares as is necessary to guarantee yourself
a seat on the board, you should look for a firm that has
____________.

A.
B.
C.
D.
E.
66. It is more difficult to value a stock than it is to value a
bond because:

A.
B.
C.
D.
E.

67. The ABC Co. has paid annual dividends of $0.30,

$0.64, $1.20, and $1.45 over the past four years.
Dividends in the future are expected to grow at a
constant rate of 3.5%. Which one of the following
formulas should be used to compute the value of the
stock today?

A.
B.
C.
D.
E.

68. A supernormal growth stock generally:

A.
B.
C.
D.
E.

69. D1 in the dividend growth model is associated with

which of the following words when solving for P0?

A.
B.
C.
D.
E.
70. If the required rate of return used in the dividend
growth model is increased, then:

A.
B.
C.
D.
E.

71. Which of the following rights are granted to

shareholders of common stock?

I. Election of corporate directors

II. Selection of all senior management executives
III. The option of voting by proxy
IV. The right to share in any remaining assets in a
liquidation

A.
B.
C.
D.
E.

72. Which of the following statements concerning

dividends is (are) correct?

I. Dividends become a liability of the corporation at the

time they are declared.
II. The stockholders determine the amount of dividend
to be paid.
III. Dividends are a tax deductible expense.
IV. Common stock dividends can be either cumulative
or non-cumulative.

A.
B.
C.
D.
E.
73. If the management of a corporation wants to raise
equity capital while maintaining control over the
corporation and limiting their cash outflows, they
should issue shares of:

A.
B.
C.
D.
E.

74. Shareholders of convertible preferred stock generally

have the:

A.
B.
C.
D.
E.

75. It is easier for an outsider to gain control over a

corporation when:

A.
B.
C.
D.
E.

76. Which one of the following statements is correct

concerning the differences between preferred and
common stock?

A.
B.
C.
D.
E.
77. There are three seats open on the board of directors of
ABC, Inc. Ann owns voting shares of ABC common
stock. If ABC uses cumulative voting, the maximum
number of shares that Ann can vote for any one position
is equal to:

A.
B.
C.
D.
E.

78. The dividend growth model assumes that:

A.
B.
C.
D.
E.

79. The capital gain yield:

A.
B.
C.
D.
E.

80. Deep Pockets Mining unexpectedly discovered an

extremely rich vein of gold. Which of the following
types of shareholders will benefit from the increased
profits that will be generated from this find?

I. Preferred shareholders
II. Convertible preferred shareholders
III. Non-voting common shareholders
IV. Common shareholders

A.
B.
C.
D.
E.
81. Given constant earnings per share, an increase in
dividends will generally:

A.
B.
C.
D.
E.

82. Which of the following statements is (are) correct

concerning preferred stock?

I. A missed dividend payment never has to be paid if the

preferred stock is cumulative.
II. All preferred stock has an obligatory sinking fund.
III. Preferred stock has a stated liquidation value.
IV. Preferred stock is never callable.

A.
B.
C.
D.
E.

83. What would you pay for a share of ABC Corporation

stock today if the next dividend will be $2 per share,
your required return on equity investments is 12%, and
the stock is expected to be worth $110 one year from
now?

A.
B.
C.
D.
E.
84. The dividend on Simple Motors common stock will be
$2 in one year, $3.50 in two years, and $5.00 in three
years. You can sell the stock for $75 in three years. If
you require a 10% return on your investment, how
much would you be willing to pay for a share of this
stock today?

A.
B.
C.
D.
E.

85. A stock that pays a constant dividend of $2.50 forever

currently sells for $21. What is the required rate of
return?

A.
B.
C.
D.
E.
F.

86. Suppose NoGro, Inc. has just issued a dividend of $2.90

per share. Subsequent dividends will remain at $2.90
indefinitely. Returns on the stock of firms like NoGro
are currently running 15%. What is the value of one
share of stock?

A.
B.
C.
D.
E.

87. ABC Company's preferred stock is selling for $25 a

share. If the required return is 12%, what will the
dividend be two years from now?

A.
B.
C.
D.
E.
88. The preferred stock of the Pearson Institute pays a
constant annual dividend of $3 and sells for $21. You
believe the stock will sell for $12 in one year. You must,
therefore, believe that the required return on the stock
will be ____ % ___________ in one year.

A.
B.
C.
D.
E.

89. What would you pay today for a stock that is expected
to make a $1.50 dividend in one year if the expected
dividend growth rate is 3% and you require a 16%
return on your investment?

A.
B.
C.
D.
E.

90. The stock of MTY Golf World currently sells for

$133.75 per share. The firm has a constant dividend
growth rate of 7% and just paid a dividend of $6.21. If
the required rate of return is 12%, what will the stock
sell for one year from now?

A.
B.
C.
D.
E.
91. Suppose Pale Hose, Inc. has just paid a dividend of
$1.40 per share. Sales and profits for Pale Hose are
expected to grow at a rate of 5% per year. Its dividend
is expected to grow by the same amount. If the required
return is 10%, what is the value of a share of Pale
Hose?

A.
B.
C.
D.
E.

92. Boomer Products, Inc. manufactures "no-inhale"

cigarettes. As its target customers age and pass on, sales
of the product are expected to decline. Thus,
demographics suggest that earnings and dividends will
decline at a rate of 4% annually forever. The firm just
paid a dividend of $2.50; given a required return of
12%, the stock should today should sell for:

A.
B.
C.
D.
E.

93. Boomer Products, Inc. manufactures "no-inhale"

cigarettes. As its target customers age and pass on, sales
of the product are expected to decline. Thus,
demographics suggest that earnings and dividends will
decline at a rate of 4% annually forever. The firm just
paid a dividend of $2.50; given a required return is
12%, the price of the stock in two years will be:

A.
B.
C.
D.
E.
94. Llano's stock is currently selling for $51. The expected
dividend one year from now is $1.50 and the required
return is 10%. What is this firm's dividend growth rate
assuming the constant dividend growth model is
appropriate?

A.
B.
C.
D.
E.

95. The current price of XYZ stock is $51. Dividends are

expected to grow at 7% indefinitely and the most recent
dividend was $1. What is the required rate of return on
XYZ stock?

A.
B.
C.
D.
E.

96. ABC Corporation's common stock dividend yield is

2.1%, it just paid a dividend of $1, and is expected to
pay a dividend of $1.07 one year from now. Dividends
are expected to grow at a constant rate indefinitely.
What is the required rate of return on ABC stock?

A.
B.
C.
D.
E.

97. Suppose that you have just purchased a share of stock

for $22.51. The most recent dividend was $1.50 and
dividends are expected to grow at a rate of 5%
indefinitely. What must your required return be on the
stock?

A.
B.
C.
D.
E.
98. Killnum Corp. announces that the dividend for the next
year will be $2.50 per share rather than the originally
expected $1.50 per share. From then on, it is expected
that dividends will resume their historical constant
growth rate of 5% per year. What would you expect to
happen to the price of the stock? Ignore any tax effects.

A.
B.
C.
D.
E.

99. McGonigal's Meats, Inc. currently pays no dividends.

The firm plans to begin paying dividends in three years.
The first dividend will be $1 and dividends are
expected to grow at 5% thereafter. Given a required
return of 15%, what would you pay for the stock
today?

A.
B.
C.
D.
E.

100. McIntyre's Moats, Inc. currently pays no dividends, but

the firm will begin paying dividends in three years. The
first dividend will be $2.50 and dividends are expected
to grow at 2% thereafter. Given a current market price
of $55.62, what is the required return on the stock?

A.
B.
C.
D.
E.
101. McIver's Meals, Inc. currently pays a $1 annual
dividend. Investors believe that dividends will grow at
15% next year, 10% annually for the two years after
that, and 5% annually thereafter. Assume the required
return is 10%. What is the current market price of the
stock?

A.
B.
C.
D.
E.

102. Biogenetics, Inc. plans to retain and reinvest all of its

earnings for the next 30 years. Beginning in year 31, the
firm will begin to pay a $12 per share dividend. The
dividend will not subsequently change. Given a
required return of 15%, what should the stock sell for
today?

A.
B.
C.
D.
E.

103. Biogenetics, Inc. plans to retain and reinvest all of its

earnings for the next 30 years. Beginning in year 31, the
firm will begin to pay a $12 per share dividend. The
dividend will increase at a 6% rate annually thereafter.
Given a required return of 15%, what the stock should
sell for today?

A.
B.
C.
D.
E.
104. Suppose the Pale Hose Corp. is expected to pay a
dividend next year of $1.75 per share. Both sales and
profits for Pale Hose are expected to grow at a rate of
15% for the following two years and then at 2% per
year thereafter indefinitely. Dividend growth is
expected to match sales growth. If the required return is
14%, what is the value of a share of Pale Hose?

A.
B.
C.
D.
E.

105. 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.

A.
B.
C.
D.
E.

106. Moore Money Inc. just paid a dividend of $1. The

required return on the stock is 15%. If it has the
following expected dividend growth rates what should
the stock sell for?

A.
B.
C.
D.
E.
107. Suppose that sales and profits of Oly Enterprises are
growing at a rate of 30% per year. At the end of four
years the growth rate will drop to a steady 4%. At the
end of year 5, Oly will issue its first dividend in the
amount of $2 per share. If the required return is 16%,
what is the value of a share of stock? Assume dividends
grow at the same rate as earnings after year 4.

A.
B.
C.
D.
E.

108. Etling Inc.'s dividend is expected to grow at 6% for the

next two years and then at 3% forever. If the current
dividend is $3 and the required return is 16%, what is
the price of the stock?

A.
B.
C.
D.
E.

109. CBC stock is expected to sell for $22 two years from
now. Supernormal growth of 5% is expected for the
next two years. The current dividend is $1 and the
required return is 15%. What constant growth rate is
expected beginning in year 3?

A.
B.
C.
D.
E.

110. If Russian Motors closed at $22 and the current

quarterly dividend is $1.25, what% yield would be
reported in The National Post?

A.
B.
C.
D.
E.
111. A firm's stock has a required return of 10%. The stock's
dividend yield is 6%. What is the dividend the firm is
expected to pay in one year if the current stock price is
$40?

A.
B.
C.
D.
E.

112. A firm's stock has a required return of 10%. The stock's

dividend yield is 6%. What dividend did the firm just
pay if the current stock price is $40?

A.
B.
C.
D.
E.

113. Saskatchewan Steel, Ltd. and Alberta Copper, Inc. both

recently announced earnings of $400,001. Both
companies have common shares outstanding of 250,000
and rates of return of 10%. Saskatchewan Steel has a
new project that will generate net cash flows of $50,000
per year forever. Alberta Copper has a new project that
will generate net cash flows of $40,000 per year
forever. The stock price of Saskatchewan Steel should
be _______ greater than the stock price of Alberta
Steel.

A.
B.
C.
D.
E.
114. There is an election being held to fill two seats on the
board of directors of a firm in which you hold stock.
There are a total of 420 shares outstanding. If the
election is conducted under cumulative voting and you
own 120 shares, how many more shares must you buy
to be assured of earning a seat on the board?

A.
B.
C.
D.
E.

115. Four directors will be elected and you wish to be one of

them. With cumulative voting, what percentage of the
shares (plus one) do you need to have on your side to
guarantee you a seat?

A.
B.
C.
D.
E.

116. A firm has 200,000 shares outstanding. If three

directors will be elected, how many shares do you need
to control to assure yourself a seat on the board under
cumulative voting procedures?

A.
B.
C.
D.
E.

117. Suppose you own 500 shares of Biogen common stock.

Two directors are to be elected. Since the firm uses
cumulative voting, you can cast as many as
_____________ votes for a single director.

A.
B.
C.
D.
E.
118. Your firm is converting from cumulative voting to
straight voting. You currently own the minimum
number of shares needed to assure yourself a seat on the
board in any election under cumulative voting. How
many more shares must you purchase in order to assure
yourself a seat under straight voting? Assume there are
a total of 500,000 shares outstanding and that three
directors go up for election at a time.

A.
B.
C.
D.
E.

119. Big Hat must have closed at _________ per share on

the previous trading day.

A.
B.
C.
D.
E.

120. For the current year, the expected dividend per share is:

A.
B.
C.
D.
E.

121. Assume the expected growth rate in dividends is 7%.

Then the constant growth model suggests that the
required return on Big Hat stock is:

A.
B.
C.
D.
E.
122. Based on the quote, a good estimate of EPS over the
last four quarters is:

A.
B.
C.
D.
E.

123. On this trading day, the number of Big Hat shares that
changed hands was:

A.
B.
C.
D.
E.

124. Assume that Big Hat paid a $1.12 annual dividend in

the previous period. What is the dividend growth rate
based on this quote?

A.
B.
C.
D.
E.

125. You believe that the required return on Big Hat stock is
12% and that the expected dividend growth rate is 10%,
which is expected to remain constant for the foreseeable
future. Is the stock currently overvalued, undervalued,
or fairly priced?

A.
B.
C.
D.
126. Assume that Big Hat is selling at its equilibrium price.
Also assume that dividends are expected to grow at a
constant rate of 25% for the foreseeable future. What is
the required return on the stock?

A.
B.
C.
D.
E.

Bradley Broadcasting expects to pay dividends of

$1.10, $1.21, and $1.331 in one, two, and three years,
respectively. After that, dividends are expected to grow
at a constant rate of 4% forever. Stocks of similar risk
yield 10%.

127. The price of Bradley Broadcasting stock today should

be:

A.
B.
C.
D.
E.

128. What is growth rate of the Bradley Broadcasting

dividend during year 2?

A.
B.
C.
D.
E.

129. How much is Bradley's stock price expected to increase

during the first year?

A.
B.
C.
D.
E.
130. What is expected capital gains yield on Bradley
Broadcasting stock during year 8?

A.
B.
C.
D.
E.

131. The Johnson Company just paid an annual dividend of

$1.60. How much would you be willing to pay for one
share of Johnson Company stock if the dividend
remains constant and you require a 9% rate of return?

A.
B.
C.
D.
E.

132. Alhandro, Inc. just paid an annual dividend of $1.03. It

has been increasing its dividends by 4% annually and is
expected to continue doing so. How much can it expect
to receive for each new share of stock offered if
investors require an 11% rate of return?

A.
B.
C.
D.
E.

133. The KLS Co. is expected to pay the following annual

dividends for the next three years: $1.00, $1.50, and
$1.60, respectively. After that time, it is expected to
increase its dividends by 3% annually. Stocks similar to
KLS are yielding 9.5%. What is one share of KLS
worth today?

A.
B.
C.
D.
E.
134. The Brown Company just announced that it will be
increasing its annual dividend to $1.68 next year and
that future dividends will be increased by 2.5%
annually. How much would you be willing to pay for
one share of the Brown Company stock if you require a
12% rate of return?

A.
B.
C.
D.
E.

135. The MIKO Corp. paid $0.84 in dividends last year. It

has just announced that it expects to increase its
dividends by 2% each year for the foreseeable future.
Currently, MIKO stock is priced at $21.32 per share.
What is the rate of return on MIKO stock?

A.
B.
C.
D.
E.

136. Swanson Brothers expects to pay a $2.20 dividend next

year which is an increase of 3.25% over the prior year.
After next year, dividends are projected to grow at a
steady rate of 2.5%. Shares of Swanson stock are
currently selling at $15.80 per share. What is the rate of
return on Swanson stock?

A.
B.
C.
D.
E.
137. Shares of Blue Dye, Inc. are currently priced at $23.64
a share and produce a total return of 14.80%. The
annual dividends of Blue Dye have been increasing at a
rate of 2.4% and are expected to continue at this rate.
What is the expected amount of the next dividend?

A.
B.
C.
D.
E.

138. Morris, Inc. has some 8% preferred stock outstanding.

The par value of the preferred stock is $100. How much
are you willing to pay for one share of Morris preferred
stock if you require a 7% rate of return?

A.
B.
C.
D.
E.

139. Noshima Industries issued dividends totaling $0.60 last

year. For the next two years, it expects dividends to
increase by 50% annually and then remain constant
thereafter. How much is one share of Noshima
Industries stock worth today if you require a 9% rate of
return?

A.
B.
C.
D.
E.
140. MDK, Inc. is a high growth firm that has never paid a
dividend. The company just issued a press release
stating that next year it plans on paying an annual
dividend of $0.34. It also stated that dividends are
expected to increase by 40% a year for each of the
following four years and then increase by 4% annually
thereafter. The required rate of return on this stock is
15%. What is the expected price per share of MDK
stock six years from now?

A.
B.
C.
D.
E.

141. Mahenterin Inc. is expecting to pay $1.23, $0.99, and

$1.13 in annual dividends for the next three years
respectively. After that, it projects that dividends will
increase by 1.5% annually. Andy is in the 25% marginal
tax bracket and wants to earn 6% after-tax on his
investments. How much is Andy willing to pay today
for one share of Mahenterin Inc. stock?

A.
B.
C.
D.
E.

142. Michael's Inc. 9% preferred stock is currently priced at

$124.30. If Michael's wishes to sell some new preferred
stock at par, what rate should it assign to the new
shares?

A.
B.
C.
D.
E.
143. Jamie just paid $8,239 for 100 shares of 6% preferred
stock. What rate of return will she earn?

A.
B.
C.
D.
E.

144. The daily newspaper lists this information on a stock:

Last $36.19, Net Chg -1.63 and Yld% 1.3. What is the
amount of the current dividend?

A.
B.
C.
D.
E.

145. ABC, Inc. has earnings per share of $1.44. The

newspaper shows a P/E of 23 and a dividend of $1.39
for shares of ABC, Inc. stock. What is the dividend
yield?

A.
B.
C.
D.
E.

146. Leon purchased 1,000 shares of LJK stock this morning

at a price of $45.67 a share. The stock paid a dividend
last year of $1.80 per share. Leon's required rate of
return is 13% on this type of investment. What is the
capital gains yield on LJK stock?

A.
B.
C.
D.
E.
147. ABC stock closed yesterday at a price of $39.80 a
share. The price today was down $2.10. ABC pays a
$0.48 annual dividend which has remained constant for
five years. What is the current dividend yield today?

A.
B.
C.
D.
E.

148. An 8% preferred stock closed yesterday at a price of

$91.32. The stock closed today at par. What is the
current dividend yield?

A.
B.
C.
D.
E.

149. Marcy owns 100 shares of Dee's Inc. while Teri owns
300 shares and Lucie owns 500 shares. There are 900
shares outstanding. There are currently three seats open
on the board of directors. With straight voting, how
many additional shares will Marcy have to buy from
Terri or Lucie to guarantee that she will be elected to
the board?

A.
B.
C.
D.
E.
150. There are 5 seats open on the board of directors of
Alpha, Inc. Jason wants to be positive that he can be
elected to one of these positions. Alpha uses straight
voting. There are 1,500 shares of Alpha stock
outstanding. Twenty% of the shares are owned by
Midge, 30% are owned by Peter, 10% are owned by
Jeff, 25% are owned by Jason and the rest are owned by
Edward. How many additional shares of stock must
Jason buy to ensure that he wins a seat?

A.
B.
C.
D.
E.

151. Marcy owns 100 shares of Dee's Inc. while Teri owns
300 shares and Lucie owns 500 shares. There are 900
shares outstanding. There are currently three seats open
on the board of directors. With cumulative voting, how
many additional shares will Marcy have to buy from
Teri or Lucie to guarantee that she will be elected to the
board?

A.
B.
C.
D.
E.

152. There are 5 seats open on the board of directors of

Alpha, Inc. Jason wants to be positive that he can be
elected to one of these positions. Alpha uses cumulative
voting. There are 1,500 shares of Alpha stock
outstanding. Twenty% of the shares are owned by
Midge, 30% are owned by Peter, 10% are owned by
Jeff, 25% are owned by Jason and the rest are owned by
Edward. How many additional shares of stock must
Jason buy to ensure that he wins a seat?

A.
B.
C.
D.
E.
153. Jackson Supply has 2,500 shares of stock outstanding.
There are three positions open on the board of directors.
Amy wants to be elected to one of those positions. How
many more shares must Amy own to guarantee her
election if Jackson Supply uses straight voting as
opposed to cumulative voting?

A.
B.
C.
D.
E.

154. The Battery Co. paid $1.20 in dividends last year.

Margaret paid a price of $15.00 a share for Battery Co.
stock and has an expected return of 8% on this
investment. What is the growth rate of the Battery Co.
stock?

A.
B.
C.
D.
E.

155. An asset characterized by cash flows that increase at a

constant rate forever is called a:

A.
B.
C.
D.
E.

156. 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.
B.
C.
D.
E.
157. Next year's annual dividend divided by the current
stock price is called the:

A.
B.
C.
D.
E.

158. The rate at which a stock's price is expected to

appreciate (or depreciate) is called the _____ yield.

A.
B.
C.
D.
E.

159. A form of equity which receives preferential treatment

in the payment of dividends is called _____ stock.

A.
B.
C.
D.
E.

160. A _____ is a form of equity security that has a stated

liquidating value.

A.
B.
C.
D.
E.

161. A form of equity which receives no preferential

treatment in either the payment of dividends or in
bankruptcy distributions is called _____ stock.

A.
B.
C.
D.
E.
162. The voting procedure where you must own 50% 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.
B.
C.
D.
E.

163. The James River Co. pays an annual dividend of $1.50

per share on its common stock. This dividend amount
has been constant for the past 15 years and is expected
to remain constant. Given this, one share of James
River Co. stock:

A.
B.
C.
D.
E.

164. The common stock of the Kenwith Co. pays a constant

annual dividend. Thus, the market price of Kenwith
stock will:

A.
B.
C.
D.
E.

165. The Koster Co. currently pays an annual dividend of

$1.00 and plans on increasing that amount by 5% each
year. The Keyser Co. currently pays an annual dividend
of $1.00 and plans on increasing its dividend by 3%
annually. Given this, it can be stated with certainty that
the _____ of the Koster Co. stock is greater than the
_____ of the Keyser Co. stock.

A.
B.
C.
D.
E.
166. 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 of
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.
B.
C.
D.
E.

167. The underlying assumption of the dividend growth

model is that a stock is worth:

A.
B.
C.
D.
E.

168. Assume that 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.
B.
C.
D.
E.
169. 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.

A.
B.
C.
D.
E.

170. The Robert Phillips Co. currently pays no dividend. The

company is anticipating dividends of $0, $0, $0, $.10,
$.20, and $.30 over the next 6 years, respectively. After
that, the company anticipates increasing the dividend by
4% annually. The first step in computing the value of
this stock today, is to compute the value of the stock in
year:

A.
B.
C.
D.
E.

171. Supernormal growth refers to a firm that increases its

dividend by:

A.
B.
C.
D.
E.
172. 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.
B.
C.
D.
E.

173. The total rate of return on a stock can be positive even

when the price of the stock depreciates because of the:

A.
B.
C.
D.
E.

174. Fred Flintlock wants to earn a total of 10% on his

investments. He recently purchased shares of ABC
stock at a price of $20 a share. The stock pays a $1 a
year dividend. The price of ABC stock needs to _____
if Fred is to achieve his 10% rate of return.

A.
B.
C.
D.
E.

175. Which one of the following correctly defines the

dividend growth model?

A.
B.
C.
D.
E.
176. Shareholders generally have the right to:

I. elect the corporate directors.

II. select the senior management of the firm.
III. elect the chief executive officer (CEO).
IV. elect the chief operating officer (COO).

A.
B.
C.
D.
E.

177. Jack owns 35 shares of stock in Beta, Inc. and wants to

exercise as much control as possible over the company.
Beta, Inc. has a total of 100 shares of stock outstanding.
Each share receives one vote. Presently, the company is
voting to elect two new directors. Which one of the
following statements must be true given this
information?

A.
B.
C.
D.
E.

178. ABC Co. is owned by a group of shareholders, all of

whom vote independently and all of whom want
personal control over the firm. If straight voting is used,
a shareholder:

A.
B.
C.
D.
E.
179. 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.
B.
C.
D.
E.

180. Common stock shareholders are generally granted

rights which include the right to:

I. share in company profits.

II. vote for company directors.
III. vote on proposed mergers.
IV. residual assets in a liquidation.

A.
B.
C.
D.
E.

181. The Scott Co. has a general dividend policy whereby it

pays a constant annual dividend of $1 per share of
common stock. The firm has 1,000 shares of stock
outstanding. The company:

A.
B.
C.
D.
E.
182. The dividends paid by a corporation:

I. to an individual becomes 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 may or may not represent
taxable income to the recipient.

A.
B.
C.
D.
E.

183. The owner of preferred stock:

A.
B.
C.
D.
E.

184. A 6% preferred stock pays _____ a year in dividends

per share. The par value of the preferred stock is $100.

A.
B.
C.
D.
E.

185. Which one of the following statements concerning

preferred stock is correct?

A.
B.
C.
D.
E.
186. In a liquidation, each share of 5% preferred stock is
generally entitled to a liquidation payment of _____ as
long as there are sufficient funds available. The par
value of the preferred stock is $100.

A.
B.
C.
D.
E.

187. The closing price of a stock is quoted at 22.87, with a

P/E of 26 and a net change of 1.42. Based on this
information, which one of the following statements is
correct?

A.
B.
C.
D.
E.

188. A stock listing contains the following information: P/E

17.5, closing price 33.10, dividend .80, YTD% chg 3.4,
and a net chg of -.50. Which of the following
statements are correct given this information?

I. The stock price has increased by 3.4% during the

current year.
II. The closing price on the previous trading day was
$32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5%.

A.
B.
C.
D.
E.
189. Angelina's made two announcements concerning its
common stock today. First, the company announced
that its next annual dividend has been set at $2.16 a
share. Secondly, the company announced that all future
dividends will increase by 4% annually. What is the
maximum amount you should pay to purchase a share
of Angelina's stock if your goal is to earn a 10% rate of
return?

A.
B.
C.
D.
E.

190. 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?

A.
B.
C.
D.
E.

191. Lee Hong Imports paid a $1.00 per share annual

dividend last week. Dividends are expected to increase
by 5% annually. What is one share of this stock worth
to you today if the appropriate discount rate is 14%?

A.
B.
C.
D.
E.
192. Majestic Homes stock traditionally provides an 8% rate
of return. The company just paid a $2 a year dividend,
which is expected to increase by 5% per year. If you are
planning on buying 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% at
the time of your purchase?

A.
B.
C.
D.
E.

193. Martin's Yachts has paid annual dividends of $1.40,

$1.75, and $2.00 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 15% rate of
return. What is the maximum amount you are willing to
pay to buy one share of this stock today?

A.
B.
C.
D.
E.

194. The current yield on Alpha's common stock is 4.8%.

The company just paid a $2.10 dividend. The rumour is
that the dividend will be $2.205 next year. The dividend
growth rate is expected to remain constant at the current
level. What is the required rate of return on Alpha's
stock?

A.
B.
C.
D.
E.
195. Mathilda's Vineyard recently paid a $3.60 annual
dividend on its common stock. This dividend increases
at an average rate of 3.5% per year. The stock is
currently selling for $62.10 a share. What is the market
rate of return?

A.
B.
C.
D.
E.

196. Bet'R Bilt Bikes just announced that its annual dividend
for this coming year will be $2.42 a share and that all
future dividends are expected to increase by 2.5%
annually. What is the market rate of return if this stock
is currently selling for $22 a share?

A.
B.
C.
D.
E.

197. The common stock of Grady Co. returned an 11.25%

rate of return last year. The dividend amount was $.70 a
share which equated to a dividend yield of 1.5%. What
was the rate of price appreciation on the stock?

A.
B.
C.
D.
E.
198. The common stock of Energizer's pays an annual
dividend that is expected to increase by 10% annually.
The stock commands a market rate of return of 12%
and sells for $60.50 a share. What is the expected
amount of the next dividend to be paid on Energizer's
common stock?

A.
B.
C.
D.
E.

199. The Reading Co. has adopted a policy of increasing the

annual dividend on its common stock at a constant rate
of 3% annually. The last dividend it paid was $0.90 a
share. What will its dividend be in six years?

A.
B.
C.
D.
E.

200. A stock pays a constant annual dividend and sells for

$31.11 a share. If the rate of return on this stock is 9%,
what is the dividend amount?

A.
B.
C.
D.
E.

201. You have decided that you would like to own some
shares of GH Corp. but need an expected 12% rate of
return to compensate for the perceived risk of such
ownership. What is the maximum you are willing to
spend per share to buy GH stock if the company pays a
constant $3.50 annual dividend per share?

A.
B.
C.
D.
E.
202. Turnips and Parsley common stock sells for $39.86 a
share at a market rate of return of 9.5%. The company
just paid its annual dividend of $1.20. What is the rate
of growth of its dividend?

A.
B.
C.
D.
E.

203. Wilbert's Clothing Stores just paid a $1.20 annual

dividend. The company has a policy whereby the
dividend increases by 2.5% annually. You would like to
purchase 100 shares of stock in this firm but realize that
you will not have the funds to do so for another three
years. If you desire a 10% rate of return, how much
should you expect to pay for 100 shares when you can
afford to buy this stock? Ignore trading costs.

A.
B.
C.
D.
E.

204. The Merriweather Co. just announced that it is

increasing its annual dividend to $1.60 and establishing
a policy whereby the dividend will increase by 3.5%
annually thereafter. How much will one share of this
stock be worth five years from now if the required rate
of return is 12%?

A.
B.
C.
D.
E.
205. Shares of the Katydid Co. common stock are currently
selling for $27.73. The last dividend paid was $1.60 per
share. The market rate of return is 10%. At what rate is
the dividend growing?

A.
B.
C.
D.
E.

206. The Extreme Reaches Corp. last paid a $1.50 per share
annual dividend. The company is planning on paying
$3.00, $5.00, $7.50, and $10.00 a share over the next
four years, respectively. After that the dividend will be
a constant $2.50 per share per year. What is the market
price of this stock if the market rate of return is 15%?

A.
B.
C.
D.
E.

207. Can't Hold Me Back, Inc. is preparing to pay its first

dividends. It is going to pay $1.00, $2.50, and $5.00 a
share over the next three years, respectively. After that,
the company has stated that the annual dividend will be
$1.25 per share indefinitely. What is this stock worth to
you per share if you demand a 7% rate of return?

A.
B.
C.
D.
E.
208. Now or Later, Inc. recently paid $1.10 as an annual
dividend. Future dividends are projected at $1.14,
$1.18, $1.22, and $1.25 over the next four years,
respectively. Beginning five years from now, the
dividend is expected to increase by 2% annually. What
is one share of this stock worth to you if you require an
8% rate of return on similar investments?

A.
B.
C.
D.
E.

209. Bill Bailey and Sons pays no dividend at the present

time. The company plans to start paying an annual
dividend in the amount of $.30 a share for two years
commencing two years from today. After that time, the
company plans on paying a constant $1 a share
dividend indefinitely. How much are you willing to pay
to buy a share of this stock if your required return is
14%?

A.
B.
C.
D.
E.

210. The Lighthouse Co. is in a downsizing mode. The

company paid a $2.50 annual dividend last year. The
company has announced plans to lower the dividend by
$.50 a year. Once the dividend amount becomes zero,
the company will cease all dividends permanently. You
place a required rate of return of 16% on this particular
stock given the company's situation. What is one share
of this stock worth to you today?

A.
B.
C.
D.
E.
211. Mother and Daughter Enterprises is a relatively new
firm that appears to be on the road to great success. The
company paid its first annual dividend yesterday in the
amount of $.28 a share. The company plans to double
each annual dividend payment for the next three years.
After that time, it is planning on paying a constant
$1.50 per share indefinitely. What is one share of this
stock worth today if the market rate of return on similar
securities is 11.5%?

A.
B.
C.
D.
E.

212. BC 'n D just paid its annual dividend of $.60 a share.

The projected dividends for the next five years are $.30,
$.50, $.75, $1.00, and $1.20, respectively. After that
time, the dividends will be held constant at $1.40. What
is this stock worth today at a 6% discount rate?

A.
B.
C.
D.
E.

213. Beaksley, Inc. is a very cyclical type of business which

is reflected in its dividend policy. The firm pays a $2.00
a share dividend every other year. The last dividend was
paid last year. Five years from now, the company is
repurchasing all of the outstanding shares at a price of
$50 a share. At an 8% rate of return, what is this stock
worth today?

A.
B.
C.
D.
E.
214. Nu-Tek, Inc. is expecting a period of intense growth, so
it has decided to retain more of its earnings to help
finance that growth. As a result it is going to reduce its
annual dividend by 10% a year for the next three years.
After that it will maintain a constant dividend of $.70 a
share. Last year, the company paid $1.80 per share.
What is the market value of this stock if the required
rate of return is 13%?

A.
B.
C.
D.
E.

215. The Double Dip Co. is expecting its ice cream sales to
decline due to the increased interest in healthy eating.
Thus, the company has announced that it will be
reducing its annual dividend by 5% a year for the next
two years. After that, it will maintain a constant
dividend of $1 a share. Last year, the company paid
$1.40 per share. What is this stock worth to you if you
require a 9% rate of return?

A.
B.
C.
D.
E.

216. Butterup's 'N More wants to offer some preferred stock

that pays an annual dividend of $2.00 a share. The
company has determined that stocks with similar
characteristics provide a 9% rate of return. What price
should Butterup's expect to receive per share for this
stock offering?

A.
B.
C.
D.
E.
217. The preferred stock of North Coast Shoreline pays an
annual dividend of $1.70 and sells for $20.24 a share.
What is the rate of return on this security?

A.
B.
C.
D.
E.

218. Jim owns shares of Abco, Inc. preferred stock which he

says provides him with a constant 6.58% rate of return.
The stock is currently priced at $45.60 a share. What is
the amount of the dividend per share?

A.
B.
C.
D.
E.

219. You want to earn a 12% rate of return. Panco, Inc.

preferred stock pays a $4.50 annual dividend. What is
the maximum price you are willing to pay for one share
of this stock?

A.
B.
C.
D.
E.

220. Cumulative voting is the procedure whereby a

shareholder:

A.
B.
C.
D.
E.
221. You own 100 shares of XY Corporation. There are
several key items which will be voted on at the next
board meeting. You are unable to physically attend the
meeting but would like your votes cast so your opinion
counts. The procedure by which you can cast your votes
without attending the meeting is called _____ voting.

A.
B.
C.
D.
E.

222. Currently, you own 5% of the common stock of Alberta

Industries. The right which grants you the ability to
maintain your current level of ownership should the
company opt to issue additional shares of stock is called
the _____ right.

A.
B.
C.
D.
E.

223. Martin Industries pays a constant $2.50 a share annual

dividend. The market price of this stock will:

A.
B.
C.
D.
E.
224. All else constant, which of the following will increase
the dividend yield of a stock?

I. an increase in the dividend amount

II. a decrease in the dividend amount
III. an increase in the stock price
IV. a decrease in the stock price

A.
B.
C.
D.
E.

225. The dividend growth model:

A.
B.
C.
D.
E.

226. Charlie's Fish Market is planning on paying annual

dividends of $1.20, $1.35, and $1.50 over the next 3
years, respectively. After that, Charlie's plans to pay a
constant dividend of $1.75 per share each year. To
compute the value of Charlie's stock today, you should
first determine the value of the stock at the end of year
_____.

A.
B.
C.
D.
E.

227. The dividend yield on a common stock is most similar

to which yield on a bond?

A.
B.
C.
D.
E.
228. Carlos owns 500 shares of Samson Timber. This year,
there are 3 open seats on the board of directors. If
Samson uses cumulative voting, Carlos will receive a
total of _____ votes of which he can cast a maximum of
_____ votes for one candidate.

A.
B.
C.
D.
E.

229. Everson Importers has 1,500 shares of common stock

outstanding of which Dino owns 500 shares. The
company has 3 open seats on the board of directors.
Dino wishes to be elected to the board but realizes that
no one else will vote for him. To guarantee his election,
Dino will have to own _____ of 1,500 plus 1 of the
shares if the firm uses straight voting versus owning
_____ of 1,500 plus 1 of the shares if the firm uses
cumulative voting.

A.
B.
C.
D.
E.

230. Preferred shareholders are generally granted the right

to:

A.
B.
C.
D.
E.

231. Common stockholders have the right to:

A.
B.
C.
D.
E.
232. Dividends on common stock:

A.
B.
C.
D.
E.

233. A.G. Thomas & Sons just paid an annual dividend of

$2.25. In conjunction with the payment, the company
announced that future dividends will be increasing by
3%. If you require an 11% rate of return, how much are
you willing to pay today to purchase one share of
Thomas' stock?

A.
B.
C.
D.
E.

234. Baker Foods made two announcements concerning its

common stock today. First, the company announced
that the next annual dividend has been set at $3.20 a
share. Secondly, the company announced that all future
dividends after that will increase by 2% annually. What
is the maximum amount you should pay today to
purchase one share of Baker's stock if your goal is to
earn a 9% rate of return?

A.
B.
C.
D.
E.

235. How much are you willing to pay today for one share of
stock if the company just paid a $1.40 annual dividend,
the dividends increase by 4% annually, and you require
a 12% rate of return?

A.
B.
C.
D.
E.
236. China Imports paid a $1.50 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 the appropriate discount rate is 12%?

A.
B.
C.
D.
E.

237. 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?

A.
B.
C.
D.
E.

238. Jessica's Home Interiors offers a common stock that

pays an annual dividend of $1.60 a share. The company
has promised to maintain a constant dividend. How
much are you willing to pay for one share of this stock
today if you want to earn a 9% return on your
investments?

A.
B.
C.
D.
E.
239. Treynor Industries has paid annual dividends of $1.55,
$1.70, and $1.85 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 16% rate of
return. What is the maximum amount you are willing to
pay to buy one share of this stock today?

A.
B.
C.
D.
E.

240. The common stock of J. K. Laminates sells for $32.60 a

share. The stock is expected to pay $2.10 per share next
month when the annual dividend is distributed. J. K.'s
has established a pattern of increasing its dividends by
3.5% annually and expects to continue doing so. What
is the market rate of return on this stock?

A.
B.
C.
D.
E.

241. The current yield on Zeta's common stock is 5.6%. The

company pays a constant dividend of $1.80. What is the
required rate of return on Zeta's stock?

A.
B.
C.
D.
E.
242. West Coast Wines recently paid a $4.40 annual
dividend on its common stock. This dividend increases
at an average rate of 4% per year. The stock is currently
selling for $70.30 a share. What is the market rate of
return?

A.
B.
C.
D.
E.

243. Mountain Gear, Inc. just announced that its annual

dividend for this coming year will be $1.40 a share and
that all future dividends are expected to increase by
4.5% annually. What is the market rate of return if this
stock is currently selling for $28 a share?

A.
B.
C.
D.
E.

244. Shares of common stock of the Timken Co. offer an

expected total return of 16%. The dividend is increasing
at a constant 6% per year. What is the capital gain
yield?

A.
B.
C.
D.
E.

245. The common stock of Filmore Brands returned a 12.6%

rate of return last year. The dividend amount was $1.10
a share which equated to a dividend yield of 2.2%.
What was the rate of price appreciation on the stock?

A.
B.
C.
D.
E.
246. F & D Industry's common stock sells for $43.05 a share
and pays an annual dividend that increases by 5%
annually. The market rate of return on this stock is 10%.
What is the amount of the last dividend paid by F & D?

A.
B.
C.
D.
E.

247. The common stock of Singer Machines pays an annual

dividend that is expected to increase by 6% annually.
The stock commands a market rate of return of 11%
and sells for $54.20 a share. What is the expected
amount of the next dividend?

A.
B.
C.
D.
E.

248. Redline Motors has adopted a policy of increasing the

annual dividend on its common stock at a constant rate
of 3.5% annually. The last dividend it paid was $1.21 a
share. What will its dividend be 7 years from now?

A.
B.
C.
D.
E.
249. You have decided that you would like to own some
shares of Martin & Miller (M&M) but need an expected
15% rate of return to compensate for the perceived risk
of such ownership. What is the maximum you are
willing to spend today to buy one share of M&M stock
if the company pays a constant $3 annual dividend per
share?

A.
B.
C.
D.
E.

250. Deltona Homes common stock sells for $52.64 a share.

The total return is 11.3%. The company just paid their
annual dividend of $2.10. What is the dividend growth
rate?

A.
B.
C.
D.
E.

251. Hilltop Markets will pay an annual dividend of $2.73 a

share on its common stock next week. Last year, the
company paid a dividend of $2.60 a share. The
company adheres to a constant rate of growth dividend
policy. What will one share of B&K common stock be
worth 5 years from now if the applicable discount rate
is 9.5%?

A.
B.
C.
D.
E.
252. Peterson Nurseries just paid a $3.20 annual dividend.
The company has a policy whereby the dividend
increases by 3% annually. You would like to purchase
100 shares of stock in this firm but realize that you will
not have the funds to do so for another two years. If you
desire a 12% rate of return, how much should you
expect to pay for 100 shares when you can afford to buy
this stock?

A.
B.
C.
D.
E.

253. Master Technicians just announced that it is increasing

its annual dividend to $4 and establishing a policy
whereby the dividend will increase by 2% annually
thereafter. How much will one share of this stock be
worth 10 years from now if the required rate of return is
14%?

A.
B.
C.
D.
E.

254. Shares of Bleckwell Remodelers common stock are

currently selling for $32.50 a share. The last annual
dividend paid was $2.25 per share. The market rate of
return is 14%. At what rate is the dividend growing?

A.
B.
C.
D.
E.
255. Massey Motors is a new firm in a rapidly growing
industry. The company is planning on increasing its
annual dividend by 10% a year for the next 3 years and
then decreasing the growth rate to 4% per year. The
company just paid its annual dividend in the amount of
$1.00 per share. What is the current value of one share
of this stock if the required rate of return is 13.75%?

A.
B.
C.
D.
E.

256. Kettle Korn, Inc. just paid a $1.40 per share annual
dividend. The company is planning on paying $1.50,
$1.65, $1.90, and $2.00 a share over the next 4 years,
respectively. After that, the dividend will be a constant
$2.25 per share per year. What is the market price of
this stock if the market rate of return is 12%?

A.
B.
C.
D.
E.

257. The Sister's Market is preparing to pay its first

dividends. It is going to pay $.60, $1.10, and $1.50 a
share over the next 3 years, respectively. After that, the
company has stated that the annual dividend will be
$1.98 per share indefinitely. What is this stock worth to
you per share if you demand a 9% rate of return?

A.
B.
C.
D.
E.
258. Winter Green Decors announced today that it will begin
paying annual dividends. The first dividend will be paid
next year in the amount of $.40 a share. The following
dividends will be $.60, $.85, and $1.00 a share annually
for the following 3 years, respectively. After that,
dividends are projected to increase by 2% per year.
How much are you willing to pay to buy one share of
this stock today if your desired rate of return is 10%?

A.
B.
C.
D.
E.

259. Berkshire Homes recently paid $2.20 as an annual

dividend. Future dividends are projected at $2.30,
$2.50, and $2.75 over the next 3 years, respectively.
Beginning four years from now, the dividend is
expected to increase by 3% annually. What is one share
of this stock worth to you today if you require an 11%
rate of return?

A.
B.
C.
D.
E.

260. Rosebud Florists pays a constant dividend of $1.50 a

share. The company announced today that it will
continue to do this for another 2 years after which time
it will discontinue paying dividends permanently. What
is one share of this stock worth today if the required
rate of return is 7.5%?

A.
B.
C.
D.
E.
261. J&J Tools pays no dividend at the present time. The
company plans to start paying an annual dividend in the
amount of $.25 a share for 3 years commencing next
year. After the 3 years, the company plans on paying a
constant $1 a share dividend indefinitely. How much
are you willing to pay to buy a share of this stock if
your required return is 13%?

A.
B.
C.
D.
E.

262. Main Street Tool & Die is in a downsizing mode. The

company paid a $2 annual dividend last year. The
company has announced plans to lower the dividend by
$.50 a year. Once the dividend amount becomes zero,
the company will cease all dividends permanently. You
place a required rate of return of 18% on this particular
stock given the company's situation. What is one share
of this stock worth to you today?

A.
B.
C.
D.
E.

263. Daily Movers is a relatively new firm. The company

paid its first annual dividend yesterday in the amount of
$.40 a share. The company plans to double each annual
dividend payment for the next 2 years. After that time,
it is planning on paying a constant $2 per share
indefinitely. What is one share of this stock worth today
if the market rate of return on similar securities is
14.5%?

A.
B.
C.
D.
E.
264. Last week, N&M Railroad paid its annual dividend of
$1.50 per share. The company has been reducing the
dividends by 10% each year. How much are you willing
to pay to purchase stock in this company if your
required rate of return is 15%?

A.
B.
C.
D.
E.

265. Nu Electronics is expecting a period of intense growth.

Thus, the company has decided to retain more of its
earnings to help finance the growth. As a result, the
company is going to reduce the annual dividend by
25% a year for the next 2 years. After that, it will
maintain a constant dividend of $.50 a share. Last year,
the company paid $2 per share. What is the market
value of this stock if the required rate of return is 14%?

A.
B.
C.
D.
E.

266. Confectioners' Corner wants to offer some preferred

stock that pays an annual dividend of $4.50 a share. The
company has determined that stocks with similar
characteristics provide an 11% rate of return. What
price should Confectioner's expect to receive per share
for this stock offering?

A.
B.
C.
D.
E.
267. The preferred stock of Deep South Pies pays an annual
dividend of $1.40 and sells for $18.20 a share. What is
the rate of return on this security?

A.
B.
C.
D.
E.

268. Allison owns shares of Bakewell preferred stock, which

she says provides her with a constant 9.5% rate of
return. The stock is currently priced at $42.10 a share.
What is the amount of the dividend per share?

A.
B.
C.
D.
E.

269. 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%. If you require a 10.5% rate of
return, how much are you willing to pay to purchase
one share of this stock?

A.
B.
C.
D.
E.
270. 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% annually. What is the maximum
amount you should pay to purchase a share of this stock
if your goal is to earn a 12% rate of return?

A.
B.
C.
D.
E.

271. 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% annually, and
you require a 14% rate of return?

A.
B.
C.
D.
E.

272. 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%?

A.
B.
C.
D.
E.
273. Elegante Homes stock traditionally provides a 16% rate
of return. The company just paid an annual dividend of
$3.20 a share and is expected to increase that amount
by 5% 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% at the time of your purchase?

A.
B.
C.
D.
E.

274. 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% return on your equity investments?

A.
B.
C.
D.
E.

275. 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% rate of
return. What is the maximum amount you are willing to
pay for one share of this stock today?

A.
B.
C.
D.
E.
276. 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% annually and expects to continue
doing so. What is the market rate of return on this
stock?

A.
B.
C.
D.
E.

277. The current yield on Martin's Mills common stock is

3.6%. 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.
B.
C.
D.
E.

278. Lake Shore Vineyards recently paid a $4.20 annual

dividend on their common stock. This dividend
increases at an average rate of 4.2% per year. The stock
is currently selling for $80.65 a share. What is the
market rate of return?

A.
B.
C.
D.
E.
279. Shares of common stock of the Windy Farms offer an
expected total return of 13.8%. The dividend is
increasing at a constant 4.2% per year. What is the
dividend yield?

A.
B.
C.
D.
E.

280. The common stock of Jesup's returned a nifty 24.6%

rate of return last year. The dividend amount was $0.40
a share which equated to a dividend yield of 0.6%.
What was the rate of price appreciation for the year?

A.
B.
C.
D.
E.

281. RTF, Inc. common stock sells for $22 a share and pays
an annual dividend that increases by 3.8% annually.
The market rate of return on this stock is 8.2%. What is
the amount of the last dividend paid?

A.
B.
C.
D.
E.

282. The Home Market has adopted a policy of increasing

the annual dividend on their common stock at a
constant rate of 3.75% annually. The firm is paying an
annual dividend of $1.10 today. What will the dividend
be five years from now?

A.
B.
C.
D.
E.
283. You have decided you would like to own some shares
of the Clean Coal Company but need a 16% rate of
return to compensate for the perceived risk of such
ownership. What is the maximum you are willing to
spend per share to buy this stock if the company pays a
constant $1.75 annual dividend per share?

A.
B.
C.
D.
E.

284. The Herb Garden common stock sells for $43.70 a

share and has a market rate of return of 11.6%. The
company just paid an annual dividend of $1.42 per
share. What is the dividend growth rate?

A.
B.
C.
D.
E.

285. KB Adventures will pay an annual dividend of $3.15 a

share on their common stock next week. Last year, the
company paid a dividend of $3.00 a share. The
company adheres to a constant rate of growth dividend
policy. What will one share of this common stock be
worth ten years from now if the applicable discount rate
is 12.5%?

A.
B.
C.
D.
E.
286. Tom's Health Clinic just paid a $4.40 annual dividend.
The company has a policy of increasing the dividend by
4% annually. You would like to purchase 100 shares of
stock in this firm but realize that you will not have the
funds to do so for another two years. If you require a
14% rate of return, how much will you be willing to
pay for the 100 shares when you can afford to make this
investment?

A.
B.
C.
D.
E.

287. Franktown Meats just announced that they are

increasing the annual dividend to $1.75 and establishing
a policy whereby the dividend will increase by 2%
annually thereafter. How much will one share of this
stock be worth six years from now if the required rate
of return is 14.5%?

A.
B.
C.
D.
E.

288. Shares of Do Naught common stock are currently

selling for $46.90. The last dividend paid was $2.21 per
share and the market rate of return is 15.8%. At what
rate is the dividend growing?

A.
B.
C.
D.
E.
289. Cellular Talk is a new firm in a rapidly growing
industry. The company is planning on increasing its
annual dividend by 25% a year for the next three years
and then decreasing the growth rate to 6% per year. The
company just paid its annual dividend in the amount of
$0.80 per share. What is the current value of one share
of this stock if the required rate of return is 17%?

A.
B.
C.
D.
E.

290. J&J Exporters paid a $1.80 per share annual dividend

last month. The company is planning on paying $2.00,
$2.50, $2.75, and $3.00 a share over the next four years,
respectively. After that the dividend will be constant at
$3.20 per share per year. What is the market price of
this stock if the market rate of return is 13%?

A.
B.
C.
D.
E.

291. The Slim Waist announced today that they will begin
paying annual dividends. The first dividend will be paid
next year in the amount of $.35 a share. The following
dividends will be $.40, $.55, and $.70 a share annually
for the following three years, respectively. After that,
dividends are projected to increase by 2.5% per year.
How much are you willing to pay to buy one share of
this stock if your desired rate of return is 12%?

A.
B.
C.
D.
E.
292. Gloria's Boutique of Ottawa recently paid $1.65 as an
annual dividend. Future dividends are projected at
$1.68, $1.72, $1.76, and $1.80 over the next four years,
respectively. Beginning five years from now, the
dividend is expected to increase by 2.5% annually.
What is one share of this stock worth to you if you
require an 11% rate of return on similar investments?

A.
B.
C.
D.
E.

293. Bliley Plumbers pays no dividend at the present time.

The company plans to start paying an annual dividend
in the amount of $0.20 a share for three years
commencing three years from today. After that time, the
company plans on paying a constant $1 a share
dividend indefinitely. How much are you willing to pay
to buy a share of this stock if your required return is
15%?

A.
B.
C.
D.
E.

294. Simplicity is a relatively new firm that appears to be on

the road to great success. The company paid their first
annual dividend yesterday in the amount of $0.15 a
share. The company plans to double each annual
dividend payment for the next four years. After that
time, they are planning on paying a constant dividend
of $2.50 per share indefinitely. What is one share of this
stock worth today if the market rate of return on similar
securities is 13.45%?

A.
B.
C.
D.
E.
295. Home Builders, Inc. is a very cyclical type of business
which is reflected in their dividend policy. The firm
pays a $3.50 per share dividend every other year. The
last dividend was paid last year. Four years from now,
the company plans to pay a $77 liquidating dividend
per share. What is the current market value of this stock
if the market rate of return is 18.5%?

A.
B.
C.
D.
E.

296. Super Sounds is expecting a period of intense growth

and has decided to retain more of their earnings to help
finance that growth. As a result, they are going to
reduce the annual dividend by 20% a year for the next
three years. After that they will maintain a constant
dividend of $1 a share. Last year, the company paid
$2.25 as the annual dividend per share. What is the
market value of this stock if the required rate of return
is 16%?

A.
B.
C.
D.
E.

297. Shirley's Cool Treats is expecting their ice cream sales

to decline due to the increased interest in healthy eating.
Thus, the company has announced that they will be
reducing their annual dividend by 4% a year for the
next four years. After that, they will maintain a constant
dividend of $1 a share. Last year, the company paid
$1.80 per share. What is this stock worth to you if you
require a 12% rate of return?

A.
B.
C.
D.
E.
298. The preferred stock of West Coast Limited pays an
annual dividend of $5.50 and sells for $52 a share.
What is the rate of return on this security?

A.
B.
C.
D.
E.

299. Stu owns shares of Markley preferred stock which he

says provides him with a constant 13.6% rate of return.
The stock is currently priced at $51.47 a share. What is
the amount of the dividend per share?

A.
B.
C.
D.
E.

300. Stocks are different from bonds because

___________________.

A.
B.
C.
D.
E.

301. A characteristic of public corporations is to allocate a

portion of their earnings to shareholders through
_______________.

A.
B.
C.
D.
E.
302. You want to invest in a stock that pays $6.00 annual
cash dividends for the next five years. At the end of the
five years, you will sell the stock for $30.00. If you
want to earn 10% on this investment, what is a fair
price for this stock if you buy it today?

A.
B.
C.
D.
E.

303. Kwak Motors Inc. pays quarterly dividends of $2.00

dividend and will maintain this policy forever. What
price should you pay for one share of preferred stock if
you want an annual return of 9.5% on your
investment?

A.
B.
C.
D.
E.

304. The next dividend is expected to be $1.80, growth rate

is 6%, and the required rate of return is 13%. What is
the stock price?

A.
B.
C.
D.
E.

305. Sedge Inc. has a 12% required rate of return. It does not
expect to pay dividends for seven years. At the end of
year 8, it will pay $2.00 per share in dividends. At that
time, Sedgwick expects its dividends to grow at 7%
forever. Calculate the stock price now.

A.
B.
C.
D.
E.
306. Dividend models suggest that ____________ determine
the value of a financial asset to which the owner is
entitled while holding the asset.

A.
B.
C.
D.
E.

307. 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?

A.
B.
C.
D.
E.

308. City Corp. is experiencing rapid growth. Dividends are

expected to grow at 20% per year during the next three
years, 10% over the following year, and then 4% per
year indefinitely. The required return on this stock is
10%. What is the projected stock price for the coming
year, if it just paid a $2 dividend?

A.
B.
C.
D.
E.
309. Chahal Corporation is expected to pay dividends of
$12, $9, $6, and $3 over the next four years. The
company plans to maintain a constant 4% growth rate
in dividends afterwards. If the required return on the
stock is 11%, what is the current share price?

A.
B.
C.
D.
E.

310. Holdom Corporation's next dividend will be $2.45 per

share. The company will increase its dividend 20% the
year after and will then reduce its dividend growth rate
by 5 percentage points per year until it reaches the
industry average of 5% dividend growth, after which
the company will keep a constant growth rate forever. If
the required return for investors is 11%, what will a
share of stock sell for today?

A.
B.
C.
D.
E.

311. NanTech Corporation's next dividend is expected to be

$1.75. Dividend growth has been a consistent 7% per
year. If investors want a 12% return, determine the
stock price 5 years ago.

A.
B.
C.
D.
E.
312. Talon Corp. just paid a dividend of $1.50 per share. The
dividends are expected to grow at 20% for the next
eight years and then level off to a 5% growth rate
indefinitely. If the required return is 12%, what is the
price of the stock today?

A.
B.
C.
D.
E.

313. Talon Corp. just paid a dividend of $1.50 per share. The
dividends have been growing at 5% per year. If the
required return is 12%, what was the price of the stock
three years ago?

A.
B.
C.
D.
E.

314. Holdom Corporation's next dividend will be $2.45 per

share. The company will increase its dividend 20% the
year after and will then reduce its dividend growth rate
by 5 percentage points per year until it reaches the
industry average of 5% dividend growth, after which
the company will keep a constant growth rate forever. If
the required return for investors is 11%, what will a
share of stock sin year 2?

A.
B.
C.
D.
E.
315. List and briefly explain the three special cases in which
we can come up with a value for a share of stock.

316. Consider a share of stock that pays a dividend of $1 at

the end of one year, $2 at the end of two years, and then
dividends grow at a constant rate of 5% per year
thereafter. If the required return is 10%, we can value
this share of stock by finding P2 using D3, then find P0 =
D1/(1.1) + D2/(1.1)2 + P2/(1.1)1. In this formula, it
appears as though we ignore all dividends from year
three on. Why is this so?

317. What are the components of the required rate of return

on a share of stock? Briefly explain each.
318. Briefly explain the differences between preferred and
common stock.

319. Explain whether it is easier to find the required return

on a publicly traded stock or a publicly traded bond,
and explain why?

320. A number of publicly traded firms pay no dividends yet

investors are willing to buy shares in these firms. How
is this possible? Does this violate our basic principle of
stock valuation? Explain?
321. A firm has two classes of common stock outstanding:
Class A, which carries voting rights of 10 votes per
share but receives no dividends (ever), and Class B,
which carries voting rights of one vote per share and
pays dividends whenever they are declared by the
board. Which would you be willing to pay more for and
why?

322. A firm has common and preferred stock outstanding,

both of which just paid a dividend of $3 per share.
Which do you think will have a higher share price and
why? If the firm also has an issue of non-callable
debentures outstanding, which do you think investors
will require a higher return on, the debentures or the
shares of common stock? Explain.

323. Explain how supernormal growth of dividends is

possible, but only in the short-term.
324. Explain the logic behind the dividend growth model.

325. Explain why preferred stock is similar to debt.

326. Give an example of a firm which might offer a

supernormal dividend growth rate for a stated period of
time.
 Chapter 08 Stock Valuation Key
1. If one uses the perpetuity model to value stock, one
assumes that P0 = P1 = . . . = , implying that the
annual return from owning the stock is zero.

FALSE
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #1
Type: Concepts

2. If one uses the constant growth model to value stock,

one assumes that P1 = P0 × (1 + g), P2 = P0 × (1 + g),
etc.

FALSE
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #2
Type: Concepts

3. According to the constant growth model, the dividend

yield is equal to the required return minus the dividend
growth rate.

TRUE
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #3
Type: Concepts

4. If a firm experiences a financial loss for the year, the

loss is shared equally by the debt holders and equity
holders.

FALSE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #4
Type: Concepts

5. A dividend on common stock, whether declared or not,

is not a legal liability of the firm.

FALSE
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #5
Type: Concepts
6. For income tax purposes, preferred stock is more like
debt than it is like common stock.

FALSE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #6
Type: Concepts

7. Most preferred stocks have dividends that are

cumulative.

TRUE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #7
Type: Concepts

8. Dividends on preferred stock are deductible from

taxable income of the issuing firm.

FALSE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #8
Type: Concepts

9. A firm must make its dividend payments to preferred

shareholders before it makes any interest payments to
its bondholders.

FALSE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #9
Type: Concepts

10. The partial excludability of dividend income from

taxable income makes preferred stock less desirable to
purchasers than it might otherwise be.

FALSE
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #10
Type: Concepts

11. The price-earnings ratios for TSX stocks which are

listed in The National Post are based on earnings per
share for the past year.

TRUE
Difficulty: Basic
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #11
Type: Concepts
12. An asset characterized by cash flows that increase at a
constant rate forever is called a:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #12
Type: Definitions

13. The stock valuation model that determines the current

stock price as the next dividend divided by the
(discount rate less the dividend growth rate) is called
the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #13
Type: Definitions

14. A stock's next expected dividend divided by the current

stock price is the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #14
Type: Definitions
15. The rate at which the stock price is expected to
appreciate (or depreciate) is the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #15
Type: Definitions

16. Equity without priority for dividends or in the event of

bankruptcy is called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #16
Type: Definitions

17. The term __________ is usually applied to stock that

has no special preference either in paying dividends or
in bankruptcy.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #17
Type: Definitions

18. "Preemptive rights" refers to:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
 Ross - Chapter 08 #18
Type: Definitions

19. Payments made by a corporation to its shareholders, in

the form of either cash, stock, or payments in kind, are
called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #19
Type: Definitions

20. Equity with differential voting rights and/or dividend

payment claims is called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #20
Type: Definitions

21. Equity with priority for dividends and in the event of

bankruptcy is called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #21
Type: Definitions
22. The short alphabetic abbreviation for an exchange-
listed stock by which the issue is identified in the
market is called the stock's _____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-03 The different ways corporate directors are elected to office.
Ross - Chapter 08 #22
Type: Definitions

23. The voting procedure where shareholders may cast all

of their votes for one member of the board is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #23
Type: Definitions

24. The voting procedure where shareholders may cast all

of their votes for each member of the board is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #24
Type: Definitions
25. The voting procedure where shareholders grant
authority to another individual to vote their shares is
called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #25
Type: Definitions

26. A stock whose price can be computed by dividing the

annual dividend amount by the required rate of return is
called a _______ growth stock.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #26
Type: Definitions

27. Preferred stock is a type of _______ growth stock.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #27
Type: Definitions
28. Given a price at year 5, the dividend in the dividend
growth model would be defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #28
Type: Definitions

29. The capital gains yield as used in the dividend growth

model is defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #29
Type: Definitions

30. The procedure which has the effect of permitting

minority participation in voting is called ____ voting.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #30
Type: Definitions

31. A cumulative dividend is defined as a dividend that is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #31
 Type: Definitions

32. Which of the following is true of non-voting common

stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #32
Type: Definitions

33. The required return is defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #33
Type: Definitions

34. A grant of authority by a shareholder allowing for

another individual to vote his/her shares is a
_____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #34
Type: Concepts
35. Which of the following is a legitimate reason the
valuation of common stock is generally harder than the
valuation of bonds?

I. Future cash flows on stocks are not known in

advance.
II. Common stocks don't have a maturity date.
III. Common stock valuation is sensitive to estimates of
the dividend growth rate.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #35
Type: Concepts

36. Which of the following is true about the differences

between debt and common stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #36
Type: Concepts

37. 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.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #37
Type: Concepts
38. Over the past four years, a company has paid dividends
of $1.00, $1.10, $1.20, and $1.30, respectively. This
pattern is expected to continue into the future. This is an
example of a company paying a:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #38
Type: Concepts

39. 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 calculate
____________.

I. The price today.

II. The price five years from now.
III. The dividend that is expected to be paid 10 years
from now.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #39
Type: Concepts
40. Which of the following is (are) true?

I. The dividend growth model only holds if, at some

point in time, the dividend growth rate exceeds the
stock's required return.
II. A decrease in the dividend growth rate will increase
a stock's market value, all else the same.
III. An increase in the required return on a stock will
decrease its market value, all else the same.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #40
Type: Concepts

41. You are attempting to value a stock in an industry

where firms are generating exceptional dividend
growth, but this growth is expected to slow to an
equilibrium growth rate in about five years. Of the
stock valuation models studied, the most appropriate is
the _______________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #41
Type: Concepts

42. As illustrated using the dividend growth model, the

total return on a share of common stock is comprised of
a ________________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #42
Type: Concepts
43. Which of the following is (are) true?

I. The dividend yield on a stock is the annual dividend

divided by the par value.
II. When the constant dividend growth model holds, g =
capital gains yield.
III. The total return on a share of stock = dividend yield
+ capital gains yield.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #43
Type: Concepts

44. Given no change in required returns, the price of a

stock whose dividend is constant will:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #44
Type: Concepts

45. Assume the anticipated growth rate in dividends is

constant for Fly-By-Nite Airlines. The expected value
of the firm's stock at the end of four years (P4) is:

I. D5/(r - g)
II. P0 × (1 + g)4
III. D0 × (1 + g)/(r - g)

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #45
Type: Concepts
46. You are attempting to value the shares of a new, high-
technology firm in a developing industry. You would
MOST likely:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #46
Type: Concepts

47. Which of the following common shareholder rights

kicks in when a merger is proposed?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #47
Type: Concepts

48. Which of the following is NOT usually a right of a

common stockholder?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #48
Type: Concepts
49. You just voted against a merger proposal made by
another corporation. You must own:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #49
Type: Concepts

50. As a common shareholder in a firm, which of the

following allows you to share proportionately in any
new stock sold?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #50
Type: Concepts

51. Which of the following is/are true about common stock

dividends?

I. Payment of dividends is a tax deductible business

expense for a corporation.
II. Dividends that have been declared but are not yet
paid are liabilities of the corporation.
III. Dividends received by both individuals and
corporations are fully taxable.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #51
Type: Concepts
52. Which of the following statements about dividends is
false?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #52
Type: Concepts

53. The primary reason for creating dual or multiple classes

of stock has to do with:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #53
Type: Concepts

54. Often, a firm creates a second class of stock that has

___________ as compared with the first class.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #54
Type: Concepts
55. Which of the following is NEVER a right of an owner
of a share of preferred stock?

I. The right to share proportionately in preferred

dividends paid.
II. The right to share proportionately in remaining
assets from a liquidation.
III. The right to vote for directors.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #55
Type: Concepts

56. Which of the following does NOT correctly complete

this sentence: Preferred stock is much like debt in that
______________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #56
Type: Concepts

57. Which of the following is a true statement regarding

publicly traded stocks and bonds?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #57
Type: Concepts
58. Which of the following typically applies to preferred
stock but NOT to common stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #58
Type: Concepts

59. Which of the following terms is typically associated

with BOTH preferred stock and common stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #59
Type: Concepts

60. Which of the following is NOT a right of an owner of a

share of common stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #60
Type: Concepts
61. Which of the following would be considered a violation
of the rights of one or more classes of a firm's
stakeholders?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #61
Type: Concepts

62. Which of the following items does NOT usually appear

in a National Post common stock quote?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #62
Type: Concepts

63. If two stocks have the same earnings per share and
required rate of return, differences in the ____________
of the two companies can account for different stock
prices.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #63
Type: Concepts
64. ____________ can freeze out minority shareholders.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #64
Type: Concepts

65. You wish to be on the board of directors of a company.

If you wish to buy as low a percentage of the total
outstanding shares as is necessary to guarantee yourself
a seat on the board, you should look for a firm that has
____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #65
Type: Concepts

66. It is more difficult to value a stock than it is to value a

bond because:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #66
Type: Concepts
67. The ABC Co. has paid annual dividends of $0.30,
$0.64, $1.20, and $1.45 over the past four years.
Dividends in the future are expected to grow at a
constant rate of 3.5%. Which one of the following
formulas should be used to compute the value of the
stock today?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #67
Type: Concepts

68. A supernormal growth stock generally:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #68
Type: Concepts

69. D1 in the dividend growth model is associated with

which of the following words when solving for P0?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #69
Type: Concepts
70. If the required rate of return used in the dividend
growth model is increased, then:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #70
Type: Concepts

71. Which of the following rights are granted to

shareholders of common stock?

I. Election of corporate directors

II. Selection of all senior management executives
III. The option of voting by proxy
IV. The right to share in any remaining assets in a
liquidation

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #71
Type: Concepts

72. Which of the following statements concerning

dividends is (are) correct?

I. Dividends become a liability of the corporation at the

time they are declared.
II. The stockholders determine the amount of dividend
to be paid.
III. Dividends are a tax deductible expense.
IV. Common stock dividends can be either cumulative
or non-cumulative.

A.
B.
C.
D.
E.
Difficulty: Intermediate
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #72
Type: Concepts

73. If the management of a corporation wants to raise

equity capital while maintaining control over the
corporation and limiting their cash outflows, they
should issue shares of:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #73
Type: Concepts

74. Shareholders of convertible preferred stock generally

have the:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #74
Type: Concepts

75. It is easier for an outsider to gain control over a

corporation when:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #75
Type: Concepts
76. Which one of the following statements is correct
concerning the differences between preferred and
common stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #76
Type: Concepts

77. There are three seats open on the board of directors of

ABC, Inc. Ann owns voting shares of ABC common
stock. If ABC uses cumulative voting, the maximum
number of shares that Ann can vote for any one position
is equal to:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #77
Type: Concepts

78. The dividend growth model assumes that:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #78
Type: Concepts
79. The capital gain yield:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #79
Type: Concepts

80. Deep Pockets Mining unexpectedly discovered an

extremely rich vein of gold. Which of the following
types of shareholders will benefit from the increased
profits that will be generated from this find?

I. Preferred shareholders
II. Convertible preferred shareholders
III. Non-voting common shareholders
IV. Common shareholders

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #80
Type: Concepts

81. Given constant earnings per share, an increase in

dividends will generally:

A.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #81
Type: Concepts
82. Which of the following statements is (are) correct
concerning preferred stock?

I. A missed dividend payment never has to be paid if the

preferred stock is cumulative.
II. All preferred stock has an obligatory sinking fund.
III. Preferred stock has a stated liquidation value.
IV. Preferred stock is never callable.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #82
Type: Concepts

83. What would you pay for a share of ABC Corporation

stock today if the next dividend will be $2 per share,
your required return on equity investments is 12%, and
the stock is expected to be worth $110 one year from
now?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #83
Type: Problems

84. The dividend on Simple Motors common stock will be

$2 in one year, $3.50 in two years, and $5.00 in three
years. You can sell the stock for $75 in three years. If
you require a 10% return on your investment, how
much would you be willing to pay for a share of this
stock today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #84
 Type: Problems

85. A stock that pays a constant dividend of $2.50 forever

currently sells for $21. What is the required rate of
return?

A.
B.
C.
D.
E.
F.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #85

86. Suppose NoGro, Inc. has just issued a dividend of $2.90

per share. Subsequent dividends will remain at $2.90
indefinitely. Returns on the stock of firms like NoGro
are currently running 15%. What is the value of one
share of stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #86
Type: Problems

87. ABC Company's preferred stock is selling for $25 a

share. If the required return is 12%, what will the
dividend be two years from now?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #87
Type: Problems
88. The preferred stock of the Pearson Institute pays a
constant annual dividend of $3 and sells for $21. You
believe the stock will sell for $12 in one year. You must,
therefore, believe that the required return on the stock
will be ____ % ___________ in one year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #88
Type: Problems

89. What would you pay today for a stock that is expected
to make a $1.50 dividend in one year if the expected
dividend growth rate is 3% and you require a 16%
return on your investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #89
Type: Problems

90. The stock of MTY Golf World currently sells for

$133.75 per share. The firm has a constant dividend
growth rate of 7% and just paid a dividend of $6.21. If
the required rate of return is 12%, what will the stock
sell for one year from now?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #90
Type: Problems
91. Suppose Pale Hose, Inc. has just paid a dividend of
$1.40 per share. Sales and profits for Pale Hose are
expected to grow at a rate of 5% per year. Its dividend
is expected to grow by the same amount. If the required
return is 10%, what is the value of a share of Pale
Hose?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #91
Type: Problems

92. Boomer Products, Inc. manufactures "no-inhale"

cigarettes. As its target customers age and pass on, sales
of the product are expected to decline. Thus,
demographics suggest that earnings and dividends will
decline at a rate of 4% annually forever. The firm just
paid a dividend of $2.50; given a required return of
12%, the stock should today should sell for:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #92
Type: Problems

93. Boomer Products, Inc. manufactures "no-inhale"

cigarettes. As its target customers age and pass on, sales
of the product are expected to decline. Thus,
demographics suggest that earnings and dividends will
decline at a rate of 4% annually forever. The firm just
paid a dividend of $2.50; given a required return is
12%, the price of the stock in two years will be:

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #93
Type: Problems

94. Llano's stock is currently selling for $51. The expected

dividend one year from now is $1.50 and the required
return is 10%. What is this firm's dividend growth rate
assuming the constant dividend growth model is
appropriate?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #94
Type: Problems

95. The current price of XYZ stock is $51. Dividends are

expected to grow at 7% indefinitely and the most recent
dividend was $1. What is the required rate of return on
XYZ stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #95
Type: Problems

96. ABC Corporation's common stock dividend yield is

2.1%, it just paid a dividend of $1, and is expected to
pay a dividend of $1.07 one year from now. Dividends
are expected to grow at a constant rate indefinitely.
What is the required rate of return on ABC stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #96
Type: Problems
97. Suppose that you have just purchased a share of stock
for $22.51. The most recent dividend was $1.50 and
dividends are expected to grow at a rate of 5%
indefinitely. What must your required return be on the
stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #97
Type: Problems

98. Killnum Corp. announces that the dividend for the next
year will be $2.50 per share rather than the originally
expected $1.50 per share. From then on, it is expected
that dividends will resume their historical constant
growth rate of 5% per year. What would you expect to
happen to the price of the stock? Ignore any tax effects.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #98
Type: Problems

99. McGonigal's Meats, Inc. currently pays no dividends.

The firm plans to begin paying dividends in three years.
The first dividend will be $1 and dividends are
expected to grow at 5% thereafter. Given a required
return of 15%, what would you pay for the stock
today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #99
Type: Problems
100. McIntyre's Moats, Inc. currently pays no dividends, but
the firm will begin paying dividends in three years. The
first dividend will be $2.50 and dividends are expected
to grow at 2% thereafter. Given a current market price
of $55.62, what is the required return on the stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #100
Type: Problems

101. McIver's Meals, Inc. currently pays a $1 annual

dividend. Investors believe that dividends will grow at
15% next year, 10% annually for the two years after
that, and 5% annually thereafter. Assume the required
return is 10%. What is the current market price of the
stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #101
Type: Problems

102. Biogenetics, Inc. plans to retain and reinvest all of its

earnings for the next 30 years. Beginning in year 31, the
firm will begin to pay a $12 per share dividend. The
dividend will not subsequently change. Given a
required return of 15%, what should the stock sell for
today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #102
Type: Problems
103. Biogenetics, Inc. plans to retain and reinvest all of its
earnings for the next 30 years. Beginning in year 31, the
firm will begin to pay a $12 per share dividend. The
dividend will increase at a 6% rate annually thereafter.
Given a required return of 15%, what the stock should
sell for today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #103
Type: Problems

104. Suppose the Pale Hose Corp. is expected to pay a

dividend next year of $1.75 per share. Both sales and
profits for Pale Hose are expected to grow at a rate of
15% for the following two years and then at 2% per
year thereafter indefinitely. Dividend growth is
expected to match sales growth. If the required return is
14%, what is the value of a share of Pale Hose?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #104
Type: Problems

105. 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.

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #105
Type: Problems

106. Moore Money Inc. just paid a dividend of $1. The

required return on the stock is 15%. If it has the
following expected dividend growth rates what should
the stock sell for?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #106
Type: Problems

107. Suppose that sales and profits of Oly Enterprises are

growing at a rate of 30% per year. At the end of four
years the growth rate will drop to a steady 4%. At the
end of year 5, Oly will issue its first dividend in the
amount of $2 per share. If the required return is 16%,
what is the value of a share of stock? Assume dividends
grow at the same rate as earnings after year 4.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #107
Type: Problems
108. Etling Inc.'s dividend is expected to grow at 6% for the
next two years and then at 3% forever. If the current
dividend is $3 and the required return is 16%, what is
the price of the stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #108
Type: Problems

109. CBC stock is expected to sell for $22 two years from
now. Supernormal growth of 5% is expected for the
next two years. The current dividend is $1 and the
required return is 15%. What constant growth rate is
expected beginning in year 3?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #109
Type: Problems

110. If Russian Motors closed at $22 and the current

quarterly dividend is $1.25, what% yield would be
reported in The National Post?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #110
Type: Problems
111. A firm's stock has a required return of 10%. The stock's
dividend yield is 6%. What is the dividend the firm is
expected to pay in one year if the current stock price is
$40?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #111
Type: Problems

112. A firm's stock has a required return of 10%. The stock's

dividend yield is 6%. What dividend did the firm just
pay if the current stock price is $40?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #112
Type: Problems

113. Saskatchewan Steel, Ltd. and Alberta Copper, Inc. both

recently announced earnings of $400,001. Both
companies have common shares outstanding of 250,000
and rates of return of 10%. Saskatchewan Steel has a
new project that will generate net cash flows of $50,000
per year forever. Alberta Copper has a new project that
will generate net cash flows of $40,000 per year
forever. The stock price of Saskatchewan Steel should
be _______ greater than the stock price of Alberta
Steel.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #113
Type: Problems
114. There is an election being held to fill two seats on the
board of directors of a firm in which you hold stock.
There are a total of 420 shares outstanding. If the
election is conducted under cumulative voting and you
own 120 shares, how many more shares must you buy
to be assured of earning a seat on the board?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #114
Type: Problems

115. Four directors will be elected and you wish to be one of

them. With cumulative voting, what percentage of the
shares (plus one) do you need to have on your side to
guarantee you a seat?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #115
Type: Problems

116. A firm has 200,000 shares outstanding. If three

directors will be elected, how many shares do you need
to control to assure yourself a seat on the board under
cumulative voting procedures?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #116
Type: Problems
117. Suppose you own 500 shares of Biogen common stock.
Two directors are to be elected. Since the firm uses
cumulative voting, you can cast as many as
_____________ votes for a single director.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #117
Type: Problems

118. Your firm is converting from cumulative voting to

straight voting. You currently own the minimum
number of shares needed to assure yourself a seat on the
board in any election under cumulative voting. How
many more shares must you purchase in order to assure
yourself a seat under straight voting? Assume there are
a total of 500,000 shares outstanding and that three
directors go up for election at a time.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #118
Type: Problems

Ross - Chapter 08

119. Big Hat must have closed at _________ per share on

the previous trading day.

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #119
Type: Problems

120. For the current year, the expected dividend per share is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #120
Type: Problems

121. Assume the expected growth rate in dividends is 7%.

Then the constant growth model suggests that the
required return on Big Hat stock is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #121
Type: Problems

122. Based on the quote, a good estimate of EPS over the

last four quarters is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #122
Type: Problems
123. On this trading day, the number of Big Hat shares that
changed hands was:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #123
Type: Problems

Ross - Chapter 08

124. Assume that Big Hat paid a $1.12 annual dividend in

the previous period. What is the dividend growth rate
based on this quote?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #124
Type: Problems

125. You believe that the required return on Big Hat stock is
12% and that the expected dividend growth rate is 10%,
which is expected to remain constant for the foreseeable
future. Is the stock currently overvalued, undervalued,
or fairly priced?

A.
B.
C.
D.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #125
Type: Problems
126. Assume that Big Hat is selling at its equilibrium price.
Also assume that dividends are expected to grow at a
constant rate of 25% for the foreseeable future. What is
the required return on the stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #126
Type: Problems

Bradley Broadcasting expects to pay dividends of

$1.10, $1.21, and $1.331 in one, two, and three years,
respectively. After that, dividends are expected to grow
at a constant rate of 4% forever. Stocks of similar risk
yield 10%.
Ross - Chapter 08

127. The price of Bradley Broadcasting stock today should

be:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #127
Type: Problems

128. What is growth rate of the Bradley Broadcasting

dividend during year 2?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #128
Type: Problems
129. How much is Bradley's stock price expected to increase
during the first year?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #129
Type: Problems

130. What is expected capital gains yield on Bradley

Broadcasting stock during year 8?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #130
Type: Problems

131. The Johnson Company just paid an annual dividend of

$1.60. How much would you be willing to pay for one
share of Johnson Company stock if the dividend
remains constant and you require a 9% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #131
Type: Problems
132. Alhandro, Inc. just paid an annual dividend of $1.03. It
has been increasing its dividends by 4% annually and is
expected to continue doing so. How much can it expect
to receive for each new share of stock offered if
investors require an 11% rate of return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #132
Type: Problems

133. The KLS Co. is expected to pay the following annual

dividends for the next three years: $1.00, $1.50, and
$1.60, respectively. After that time, it is expected to
increase its dividends by 3% annually. Stocks similar to
KLS are yielding 9.5%. What is one share of KLS
worth today?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #133
Type: Problems

134. The Brown Company just announced that it will be

increasing its annual dividend to $1.68 next year and
that future dividends will be increased by 2.5%
annually. How much would you be willing to pay for
one share of the Brown Company stock if you require a
12% rate of return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #134
Type: Problems
135. The MIKO Corp. paid $0.84 in dividends last year. It
has just announced that it expects to increase its
dividends by 2% each year for the foreseeable future.
Currently, MIKO stock is priced at $21.32 per share.
What is the rate of return on MIKO stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #135
Type: Problems

136. Swanson Brothers expects to pay a $2.20 dividend next

year which is an increase of 3.25% over the prior year.
After next year, dividends are projected to grow at a
steady rate of 2.5%. Shares of Swanson stock are
currently selling at $15.80 per share. What is the rate of
return on Swanson stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #136
Type: Problems

137. Shares of Blue Dye, Inc. are currently priced at $23.64

a share and produce a total return of 14.80%. The
annual dividends of Blue Dye have been increasing at a
rate of 2.4% and are expected to continue at this rate.
What is the expected amount of the next dividend?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #137
Type: Problems
138. Morris, Inc. has some 8% preferred stock outstanding.
The par value of the preferred stock is $100. How much
are you willing to pay for one share of Morris preferred
stock if you require a 7% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #138
Type: Problems

139. Noshima Industries issued dividends totaling $0.60 last

year. For the next two years, it expects dividends to
increase by 50% annually and then remain constant
thereafter. How much is one share of Noshima
Industries stock worth today if you require a 9% rate of
return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #139
Type: Problems

140. MDK, Inc. is a high growth firm that has never paid a
dividend. The company just issued a press release
stating that next year it plans on paying an annual
dividend of $0.34. It also stated that dividends are
expected to increase by 40% a year for each of the
following four years and then increase by 4% annually
thereafter. The required rate of return on this stock is
15%. What is the expected price per share of MDK
stock six years from now?

A.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #140
 Type: Problems

141. Mahenterin Inc. is expecting to pay $1.23, $0.99, and

$1.13 in annual dividends for the next three years
respectively. After that, it projects that dividends will
increase by 1.5% annually. Andy is in the 25% marginal
tax bracket and wants to earn 6% after-tax on his
investments. How much is Andy willing to pay today
for one share of Mahenterin Inc. stock?

A.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #141
Type: Problems

142. Michael's Inc. 9% preferred stock is currently priced at

$124.30. If Michael's wishes to sell some new preferred
stock at par, what rate should it assign to the new
shares?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #142
Type: Problems

143. Jamie just paid $8,239 for 100 shares of 6% preferred

stock. What rate of return will she earn?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #143
Type: Problems
144. The daily newspaper lists this information on a stock:
Last $36.19, Net Chg -1.63 and Yld% 1.3. What is the
amount of the current dividend?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #144
Type: Problems

145. ABC, Inc. has earnings per share of $1.44. The

newspaper shows a P/E of 23 and a dividend of $1.39
for shares of ABC, Inc. stock. What is the dividend
yield?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #145
Type: Problems

146. Leon purchased 1,000 shares of LJK stock this morning

at a price of $45.67 a share. The stock paid a dividend
last year of $1.80 per share. Leon's required rate of
return is 13% on this type of investment. What is the
capital gains yield on LJK stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #146
Type: Problems
147. ABC stock closed yesterday at a price of $39.80 a
share. The price today was down $2.10. ABC pays a
$0.48 annual dividend which has remained constant for
five years. What is the current dividend yield today?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #147
Type: Problems

148. An 8% preferred stock closed yesterday at a price of

$91.32. The stock closed today at par. What is the
current dividend yield?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #148
Type: Problems

149. Marcy owns 100 shares of Dee's Inc. while Teri owns
300 shares and Lucie owns 500 shares. There are 900
shares outstanding. There are currently three seats open
on the board of directors. With straight voting, how
many additional shares will Marcy have to buy from
Terri or Lucie to guarantee that she will be elected to
the board?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #149
Type: Problems
150. There are 5 seats open on the board of directors of
Alpha, Inc. Jason wants to be positive that he can be
elected to one of these positions. Alpha uses straight
voting. There are 1,500 shares of Alpha stock
outstanding. Twenty% of the shares are owned by
Midge, 30% are owned by Peter, 10% are owned by
Jeff, 25% are owned by Jason and the rest are owned by
Edward. How many additional shares of stock must
Jason buy to ensure that he wins a seat?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #150
Type: Problems

151. Marcy owns 100 shares of Dee's Inc. while Teri owns
300 shares and Lucie owns 500 shares. There are 900
shares outstanding. There are currently three seats open
on the board of directors. With cumulative voting, how
many additional shares will Marcy have to buy from
Teri or Lucie to guarantee that she will be elected to the
board?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #151
Type: Problems
152. There are 5 seats open on the board of directors of
Alpha, Inc. Jason wants to be positive that he can be
elected to one of these positions. Alpha uses cumulative
voting. There are 1,500 shares of Alpha stock
outstanding. Twenty% of the shares are owned by
Midge, 30% are owned by Peter, 10% are owned by
Jeff, 25% are owned by Jason and the rest are owned by
Edward. How many additional shares of stock must
Jason buy to ensure that he wins a seat?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #152
Type: Problems

153. Jackson Supply has 2,500 shares of stock outstanding.

There are three positions open on the board of directors.
Amy wants to be elected to one of those positions. How
many more shares must Amy own to guarantee her
election if Jackson Supply uses straight voting as
opposed to cumulative voting?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #153
Type: Problems

154. The Battery Co. paid $1.20 in dividends last year.

Margaret paid a price of $15.00 a share for Battery Co.
stock and has an expected return of 8% on this
investment. What is the growth rate of the Battery Co.
stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #154
Type: Problems

155. An asset characterized by cash flows that increase at a

constant rate forever is called a:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #155
Type: Definitions

156. 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #156
Type: Definitions

157. Next year's annual dividend divided by the current

stock price is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #157
Type: Definitions
158. The rate at which a stock's price is expected to
appreciate (or depreciate) is called the _____ yield.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #158
Type: Definitions

159. A form of equity which receives preferential treatment

in the payment of dividends is called _____ stock.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #159
Type: Definitions

160. A _____ is a form of equity security that has a stated

liquidating value.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #160
Type: Definitions
161. A form of equity which receives no preferential
treatment in either the payment of dividends or in
bankruptcy distributions is called _____ stock.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #161
Type: Definitions

162. The voting procedure where you must own 50% 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #162
Type: Definitions

163. The James River Co. pays an annual dividend of $1.50

per share on its common stock. This dividend amount
has been constant for the past 15 years and is expected
to remain constant. Given this, one share of James
River Co. stock:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #163
Type: Concepts
164. The common stock of the Kenwith Co. pays a constant
annual dividend. Thus, the market price of Kenwith
stock will:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #164
Type: Concepts

165. The Koster Co. currently pays an annual dividend of

$1.00 and plans on increasing that amount by 5% each
year. The Keyser Co. currently pays an annual dividend
of $1.00 and plans on increasing its dividend by 3%
annually. Given this, it can be stated with certainty that
the _____ of the Koster Co. stock is greater than the
_____ of the Keyser Co. stock.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #165
Type: Concepts

166. 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 of
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.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #166
Type: Concepts

167. The underlying assumption of the dividend growth

model is that a stock is worth:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #167
Type: Concepts

168. Assume that 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #168
Type: Concepts

169. 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.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #169
Type: Concepts
170. The Robert Phillips Co. currently pays no dividend. The
company is anticipating dividends of $0, $0, $0, $.10,
$.20, and $.30 over the next 6 years, respectively. After
that, the company anticipates increasing the dividend by
4% annually. The first step in computing the value of
this stock today, is to compute the value of the stock in
year:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #170
Type: Concepts

171. Supernormal growth refers to a firm that increases its

dividend by:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #171
Type: Concepts

172. 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #172
Type: Concepts
173. The total rate of return on a stock can be positive even
when the price of the stock depreciates because of the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #173
Type: Concepts

174. Fred Flintlock wants to earn a total of 10% on his

investments. He recently purchased shares of ABC
stock at a price of $20 a share. The stock pays a $1 a
year dividend. The price of ABC stock needs to _____
if Fred is to achieve his 10% rate of return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #174
Type: Concepts

175. Which one of the following correctly defines the

dividend growth model?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #175
Type: Concepts
176. Shareholders generally have the right to:

I. elect the corporate directors.

II. select the senior management of the firm.
III. elect the chief executive officer (CEO).
IV. elect the chief operating officer (COO).

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #176
Type: Concepts

177. Jack owns 35 shares of stock in Beta, Inc. and wants to

exercise as much control as possible over the company.
Beta, Inc. has a total of 100 shares of stock outstanding.
Each share receives one vote. Presently, the company is
voting to elect two new directors. Which one of the
following statements must be true given this
information?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #177
Type: Concepts

178. ABC Co. is owned by a group of shareholders, all of

whom vote independently and all of whom want
personal control over the firm. If straight voting is used,
a shareholder:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #178
Type: Concepts
179. 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #179
Type: Concepts

180. Common stock shareholders are generally granted

rights which include the right to:

I. share in company profits.

II. vote for company directors.
III. vote on proposed mergers.
IV. residual assets in a liquidation.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #180
Type: Concepts

181. The Scott Co. has a general dividend policy whereby it

pays a constant annual dividend of $1 per share of
common stock. The firm has 1,000 shares of stock
outstanding. The company:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #181
Type: Concepts
182. The dividends paid by a corporation:

I. to an individual becomes 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 may or may not represent
taxable income to the recipient.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #182
Type: Concepts

183. The owner of preferred stock:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #183
Type: Concepts

184. A 6% preferred stock pays _____ a year in dividends

per share. The par value of the preferred stock is $100.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #184
Type: Concepts
185. Which one of the following statements concerning
preferred stock is correct?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #185
Type: Concepts

186. In a liquidation, each share of 5% preferred stock is

generally entitled to a liquidation payment of _____ as
long as there are sufficient funds available. The par
value of the preferred stock is $100.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #186
Type: Concepts

187. The closing price of a stock is quoted at 22.87, with a

P/E of 26 and a net change of 1.42. Based on this
information, which one of the following statements is
correct?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #187
Type: Concepts
188. A stock listing contains the following information: P/E
17.5, closing price 33.10, dividend .80, YTD% chg 3.4,
and a net chg of -.50. Which of the following
statements are correct given this information?

I. The stock price has increased by 3.4% during the

current year.
II. The closing price on the previous trading day was
$32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-04 The stock market quotations and the basics of stock market reporting.
Ross - Chapter 08 #188
Type: Concepts

189. Angelina's made two announcements concerning its

common stock today. First, the company announced
that its next annual dividend has been set at $2.16 a
share. Secondly, the company announced that all future
dividends will increase by 4% annually. What is the
maximum amount you should pay to purchase a share
of Angelina's stock if your goal is to earn a 10% rate of
return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #189
Type: Problems
190. 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?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #190
Type: Problems

191. Lee Hong Imports paid a $1.00 per share annual

dividend last week. Dividends are expected to increase
by 5% annually. What is one share of this stock worth
to you today if the appropriate discount rate is 14%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #191
Type: Problems

192. Majestic Homes stock traditionally provides an 8% rate

of return. The company just paid a $2 a year dividend,
which is expected to increase by 5% per year. If you are
planning on buying 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% at
the time of your purchase?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #192
Type: Problems
193. Martin's Yachts has paid annual dividends of $1.40,
$1.75, and $2.00 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 15% rate of
return. What is the maximum amount you are willing to
pay to buy one share of this stock today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #193
Type: Problems

194. The current yield on Alpha's common stock is 4.8%.

The company just paid a $2.10 dividend. The rumour is
that the dividend will be $2.205 next year. The dividend
growth rate is expected to remain constant at the current
level. What is the required rate of return on Alpha's
stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #194
Type: Problems

195. Mathilda's Vineyard recently paid a $3.60 annual

dividend on its common stock. This dividend increases
at an average rate of 3.5% per year. The stock is
currently selling for $62.10 a share. What is the market
rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #195
Type: Problems

196. Bet'R Bilt Bikes just announced that its annual dividend
for this coming year will be $2.42 a share and that all
future dividends are expected to increase by 2.5%
annually. What is the market rate of return if this stock
is currently selling for $22 a share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #196
Type: Problems

197. The common stock of Grady Co. returned an 11.25%

rate of return last year. The dividend amount was $.70 a
share which equated to a dividend yield of 1.5%. What
was the rate of price appreciation on the stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #197
Type: Problems

198. The common stock of Energizer's pays an annual

dividend that is expected to increase by 10% annually.
The stock commands a market rate of return of 12%
and sells for $60.50 a share. What is the expected
amount of the next dividend to be paid on Energizer's
common stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #198
Type: Problems
199. The Reading Co. has adopted a policy of increasing the
annual dividend on its common stock at a constant rate
of 3% annually. The last dividend it paid was $0.90 a
share. What will its dividend be in six years?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #199
Type: Problems

200. A stock pays a constant annual dividend and sells for

$31.11 a share. If the rate of return on this stock is 9%,
what is the dividend amount?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #200
Type: Problems

201. You have decided that you would like to own some
shares of GH Corp. but need an expected 12% rate of
return to compensate for the perceived risk of such
ownership. What is the maximum you are willing to
spend per share to buy GH stock if the company pays a
constant $3.50 annual dividend per share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #201
Type: Problems
202. Turnips and Parsley common stock sells for $39.86 a
share at a market rate of return of 9.5%. The company
just paid its annual dividend of $1.20. What is the rate
of growth of its dividend?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #202
Type: Problems

203. Wilbert's Clothing Stores just paid a $1.20 annual

dividend. The company has a policy whereby the
dividend increases by 2.5% annually. You would like to
purchase 100 shares of stock in this firm but realize that
you will not have the funds to do so for another three
years. If you desire a 10% rate of return, how much
should you expect to pay for 100 shares when you can
afford to buy this stock? Ignore trading costs.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #203
Type: Problems

204. The Merriweather Co. just announced that it is

increasing its annual dividend to $1.60 and establishing
a policy whereby the dividend will increase by 3.5%
annually thereafter. How much will one share of this
stock be worth five years from now if the required rate
of return is 12%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #204
Type: Problems
205. Shares of the Katydid Co. common stock are currently
selling for $27.73. The last dividend paid was $1.60 per
share. The market rate of return is 10%. At what rate is
the dividend growing?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #205
Type: Problems

206. The Extreme Reaches Corp. last paid a $1.50 per share
annual dividend. The company is planning on paying
$3.00, $5.00, $7.50, and $10.00 a share over the next
four years, respectively. After that the dividend will be
a constant $2.50 per share per year. What is the market
price of this stock if the market rate of return is 15%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #206
Type: Problems

207. Can't Hold Me Back, Inc. is preparing to pay its first

dividends. It is going to pay $1.00, $2.50, and $5.00 a
share over the next three years, respectively. After that,
the company has stated that the annual dividend will be
$1.25 per share indefinitely. What is this stock worth to
you per share if you demand a 7% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #207
Type: Problems
208. Now or Later, Inc. recently paid $1.10 as an annual
dividend. Future dividends are projected at $1.14,
$1.18, $1.22, and $1.25 over the next four years,
respectively. Beginning five years from now, the
dividend is expected to increase by 2% annually. What
is one share of this stock worth to you if you require an
8% rate of return on similar investments?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #208
Type: Problems

209. Bill Bailey and Sons pays no dividend at the present

time. The company plans to start paying an annual
dividend in the amount of $.30 a share for two years
commencing two years from today. After that time, the
company plans on paying a constant $1 a share
dividend indefinitely. How much are you willing to pay
to buy a share of this stock if your required return is
14%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #209
Type: Problems
210. The Lighthouse Co. is in a downsizing mode. The
company paid a $2.50 annual dividend last year. The
company has announced plans to lower the dividend by
$.50 a year. Once the dividend amount becomes zero,
the company will cease all dividends permanently. You
place a required rate of return of 16% on this particular
stock given the company's situation. What is one share
of this stock worth to you today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #210
Type: Problems

211. Mother and Daughter Enterprises is a relatively new

firm that appears to be on the road to great success. The
company paid its first annual dividend yesterday in the
amount of $.28 a share. The company plans to double
each annual dividend payment for the next three years.
After that time, it is planning on paying a constant
$1.50 per share indefinitely. What is one share of this
stock worth today if the market rate of return on similar
securities is 11.5%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #211
Type: Problems
212. BC 'n D just paid its annual dividend of $.60 a share.
The projected dividends for the next five years are $.30,
$.50, $.75, $1.00, and $1.20, respectively. After that
time, the dividends will be held constant at $1.40. What
is this stock worth today at a 6% discount rate?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #212
Type: Problems

213. Beaksley, Inc. is a very cyclical type of business which

is reflected in its dividend policy. The firm pays a $2.00
a share dividend every other year. The last dividend was
paid last year. Five years from now, the company is
repurchasing all of the outstanding shares at a price of
$50 a share. At an 8% rate of return, what is this stock
worth today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #213
Type: Problems

214. Nu-Tek, Inc. is expecting a period of intense growth, so

it has decided to retain more of its earnings to help
finance that growth. As a result it is going to reduce its
annual dividend by 10% a year for the next three years.
After that it will maintain a constant dividend of $.70 a
share. Last year, the company paid $1.80 per share.
What is the market value of this stock if the required
rate of return is 13%?

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #214
Type: Problems

215. The Double Dip Co. is expecting its ice cream sales to
decline due to the increased interest in healthy eating.
Thus, the company has announced that it will be
reducing its annual dividend by 5% a year for the next
two years. After that, it will maintain a constant
dividend of $1 a share. Last year, the company paid
$1.40 per share. What is this stock worth to you if you
require a 9% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #215
Type: Problems

216. Butterup's 'N More wants to offer some preferred stock

that pays an annual dividend of $2.00 a share. The
company has determined that stocks with similar
characteristics provide a 9% rate of return. What price
should Butterup's expect to receive per share for this
stock offering?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #216
Type: Problems

217. The preferred stock of North Coast Shoreline pays an

annual dividend of $1.70 and sells for $20.24 a share.
What is the rate of return on this security?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
 Ross - Chapter 08 #217
Type: Problems

218. Jim owns shares of Abco, Inc. preferred stock which he

says provides him with a constant 6.58% rate of return.
The stock is currently priced at $45.60 a share. What is
the amount of the dividend per share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #218
Type: Problems

219. You want to earn a 12% rate of return. Panco, Inc.

preferred stock pays a $4.50 annual dividend. What is
the maximum price you are willing to pay for one share
of this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #219
Type: Problems

220. Cumulative voting is the procedure whereby a

shareholder:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #220
Type: Definitions
221. You own 100 shares of XY Corporation. There are
several key items which will be voted on at the next
board meeting. You are unable to physically attend the
meeting but would like your votes cast so your opinion
counts. The procedure by which you can cast your votes
without attending the meeting is called _____ voting.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #221
Type: Definitions

222. Currently, you own 5% of the common stock of Alberta

Industries. The right which grants you the ability to
maintain your current level of ownership should the
company opt to issue additional shares of stock is called
the _____ right.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #222
Type: Definitions

223. Martin Industries pays a constant $2.50 a share annual

dividend. The market price of this stock will:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #223
Type: Concepts
224. All else constant, which of the following will increase
the dividend yield of a stock?

I. an increase in the dividend amount

II. a decrease in the dividend amount
III. an increase in the stock price
IV. a decrease in the stock price

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #224
Type: Concepts

225. The dividend growth model:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #225
Type: Concepts

226. Charlie's Fish Market is planning on paying annual

dividends of $1.20, $1.35, and $1.50 over the next 3
years, respectively. After that, Charlie's plans to pay a
constant dividend of $1.75 per share each year. To
compute the value of Charlie's stock today, you should
first determine the value of the stock at the end of year
_____.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #226
Type: Concepts
227. The dividend yield on a common stock is most similar
to which yield on a bond?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #227
Type: Definitions

228. Carlos owns 500 shares of Samson Timber. This year,

there are 3 open seats on the board of directors. If
Samson uses cumulative voting, Carlos will receive a
total of _____ votes of which he can cast a maximum of
_____ votes for one candidate.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #228
Type: Concepts

229. Everson Importers has 1,500 shares of common stock

outstanding of which Dino owns 500 shares. The
company has 3 open seats on the board of directors.
Dino wishes to be elected to the board but realizes that
no one else will vote for him. To guarantee his election,
Dino will have to own _____ of 1,500 plus 1 of the
shares if the firm uses straight voting versus owning
_____ of 1,500 plus 1 of the shares if the firm uses
cumulative voting.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #229
Type: Concepts
230. Preferred shareholders are generally granted the right
to:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #230
Type: Concepts

231. Common stockholders have the right to:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #231
Type: Concepts

232. Dividends on common stock:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #232
Type: Concepts
233. A.G. Thomas & Sons just paid an annual dividend of
$2.25. In conjunction with the payment, the company
announced that future dividends will be increasing by
3%. If you require an 11% rate of return, how much are
you willing to pay today to purchase one share of
Thomas' stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #233
Type: Problems

234. Baker Foods made two announcements concerning its

common stock today. First, the company announced
that the next annual dividend has been set at $3.20 a
share. Secondly, the company announced that all future
dividends after that will increase by 2% annually. What
is the maximum amount you should pay today to
purchase one share of Baker's stock if your goal is to
earn a 9% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #234
Type: Problems

235. How much are you willing to pay today for one share of
stock if the company just paid a $1.40 annual dividend,
the dividends increase by 4% annually, and you require
a 12% rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #235
Type: Problems
236. China Imports paid a $1.50 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 the appropriate discount rate is 12%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #236
Type: Problems

237. 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?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #237
Type: Problems

238. Jessica's Home Interiors offers a common stock that

pays an annual dividend of $1.60 a share. The company
has promised to maintain a constant dividend. How
much are you willing to pay for one share of this stock
today if you want to earn a 9% return on your
investments?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #238
Type: Problems
239. Treynor Industries has paid annual dividends of $1.55,
$1.70, and $1.85 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 16% rate of
return. What is the maximum amount you are willing to
pay to buy one share of this stock today?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #239
Type: Problems

240. The common stock of J. K. Laminates sells for $32.60 a

share. The stock is expected to pay $2.10 per share next
month when the annual dividend is distributed. J. K.'s
has established a pattern of increasing its dividends by
3.5% annually and expects to continue doing so. What
is the market rate of return on this stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #240
Type: Problems

241. The current yield on Zeta's common stock is 5.6%. The

company pays a constant dividend of $1.80. What is the
required rate of return on Zeta's stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #241
Type: Problems
242. West Coast Wines recently paid a $4.40 annual
dividend on its common stock. This dividend increases
at an average rate of 4% per year. The stock is currently
selling for $70.30 a share. What is the market rate of
return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #242
Type: Problems

243. Mountain Gear, Inc. just announced that its annual

dividend for this coming year will be $1.40 a share and
that all future dividends are expected to increase by
4.5% annually. What is the market rate of return if this
stock is currently selling for $28 a share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #243
Type: Problems

244. Shares of common stock of the Timken Co. offer an

expected total return of 16%. The dividend is increasing
at a constant 6% per year. What is the capital gain
yield?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #244
Type: Problems
245. The common stock of Filmore Brands returned a 12.6%
rate of return last year. The dividend amount was $1.10
a share which equated to a dividend yield of 2.2%.
What was the rate of price appreciation on the stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #245
Type: Problems

246. F & D Industry's common stock sells for $43.05 a share

and pays an annual dividend that increases by 5%
annually. The market rate of return on this stock is 10%.
What is the amount of the last dividend paid by F & D?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #246
Type: Problems

247. The common stock of Singer Machines pays an annual

dividend that is expected to increase by 6% annually.
The stock commands a market rate of return of 11%
and sells for $54.20 a share. What is the expected
amount of the next dividend?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #247
Type: Problems
248. Redline Motors has adopted a policy of increasing the
annual dividend on its common stock at a constant rate
of 3.5% annually. The last dividend it paid was $1.21 a
share. What will its dividend be 7 years from now?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #248
Type: Problems

249. You have decided that you would like to own some
shares of Martin & Miller (M&M) but need an expected
15% rate of return to compensate for the perceived risk
of such ownership. What is the maximum you are
willing to spend today to buy one share of M&M stock
if the company pays a constant $3 annual dividend per
share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #249
Type: Problems

250. Deltona Homes common stock sells for $52.64 a share.

The total return is 11.3%. The company just paid their
annual dividend of $2.10. What is the dividend growth
rate?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #250
Type: Problems
251. Hilltop Markets will pay an annual dividend of $2.73 a
share on its common stock next week. Last year, the
company paid a dividend of $2.60 a share. The
company adheres to a constant rate of growth dividend
policy. What will one share of B&K common stock be
worth 5 years from now if the applicable discount rate
is 9.5%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #251
Type: Problems

252. Peterson Nurseries just paid a $3.20 annual dividend.

The company has a policy whereby the dividend
increases by 3% annually. You would like to purchase
100 shares of stock in this firm but realize that you will
not have the funds to do so for another two years. If you
desire a 12% rate of return, how much should you
expect to pay for 100 shares when you can afford to buy
this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #252
Type: Problems
253. Master Technicians just announced that it is increasing
its annual dividend to $4 and establishing a policy
whereby the dividend will increase by 2% annually
thereafter. How much will one share of this stock be
worth 10 years from now if the required rate of return is
14%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #253
Type: Problems

254. Shares of Bleckwell Remodelers common stock are

currently selling for $32.50 a share. The last annual
dividend paid was $2.25 per share. The market rate of
return is 14%. At what rate is the dividend growing?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #254
Type: Problems

255. Massey Motors is a new firm in a rapidly growing

industry. The company is planning on increasing its
annual dividend by 10% a year for the next 3 years and
then decreasing the growth rate to 4% per year. The
company just paid its annual dividend in the amount of
$1.00 per share. What is the current value of one share
of this stock if the required rate of return is 13.75%?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #255
Type: Problems
256. Kettle Korn, Inc. just paid a $1.40 per share annual
dividend. The company is planning on paying $1.50,
$1.65, $1.90, and $2.00 a share over the next 4 years,
respectively. After that, the dividend will be a constant
$2.25 per share per year. What is the market price of
this stock if the market rate of return is 12%?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #256
Type: Problems

257. The Sister's Market is preparing to pay its first

dividends. It is going to pay $.60, $1.10, and $1.50 a
share over the next 3 years, respectively. After that, the
company has stated that the annual dividend will be
$1.98 per share indefinitely. What is this stock worth to
you per share if you demand a 9% rate of return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #257
Type: Problems

258. Winter Green Decors announced today that it will begin

paying annual dividends. The first dividend will be paid
next year in the amount of $.40 a share. The following
dividends will be $.60, $.85, and $1.00 a share annually
for the following 3 years, respectively. After that,
dividends are projected to increase by 2% per year.
How much are you willing to pay to buy one share of
this stock today if your desired rate of return is 10%?

A.
B.
C.
D.
E.
Difficulty: Intermediate
 Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #258
Type: Problems

259. Berkshire Homes recently paid $2.20 as an annual

dividend. Future dividends are projected at $2.30,
$2.50, and $2.75 over the next 3 years, respectively.
Beginning four years from now, the dividend is
expected to increase by 3% annually. What is one share
of this stock worth to you today if you require an 11%
rate of return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #259
Type: Problems

260. Rosebud Florists pays a constant dividend of $1.50 a

share. The company announced today that it will
continue to do this for another 2 years after which time
it will discontinue paying dividends permanently. What
is one share of this stock worth today if the required
rate of return is 7.5%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #260
Type: Problems
261. J&J Tools pays no dividend at the present time. The
company plans to start paying an annual dividend in the
amount of $.25 a share for 3 years commencing next
year. After the 3 years, the company plans on paying a
constant $1 a share dividend indefinitely. How much
are you willing to pay to buy a share of this stock if
your required return is 13%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #261
Type: Problems

262. Main Street Tool & Die is in a downsizing mode. The

company paid a $2 annual dividend last year. The
company has announced plans to lower the dividend by
$.50 a year. Once the dividend amount becomes zero,
the company will cease all dividends permanently. You
place a required rate of return of 18% on this particular
stock given the company's situation. What is one share
of this stock worth to you today?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #262
Type: Problems
263. Daily Movers is a relatively new firm. The company
paid its first annual dividend yesterday in the amount of
$.40 a share. The company plans to double each annual
dividend payment for the next 2 years. After that time,
it is planning on paying a constant $2 per share
indefinitely. What is one share of this stock worth today
if the market rate of return on similar securities is
14.5%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #263
Type: Problems

264. Last week, N&M Railroad paid its annual dividend of

$1.50 per share. The company has been reducing the
dividends by 10% each year. How much are you willing
to pay to purchase stock in this company if your
required rate of return is 15%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #264
Type: Problems
265. Nu Electronics is expecting a period of intense growth.
Thus, the company has decided to retain more of its
earnings to help finance the growth. As a result, the
company is going to reduce the annual dividend by
25% a year for the next 2 years. After that, it will
maintain a constant dividend of $.50 a share. Last year,
the company paid $2 per share. What is the market
value of this stock if the required rate of return is 14%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #265
Type: Problems

266. Confectioners' Corner wants to offer some preferred

stock that pays an annual dividend of $4.50 a share. The
company has determined that stocks with similar
characteristics provide an 11% rate of return. What
price should Confectioner's expect to receive per share
for this stock offering?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #266
Type: Problems

267. The preferred stock of Deep South Pies pays an annual

dividend of $1.40 and sells for $18.20 a share. What is
the rate of return on this security?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #267
Type: Problems
268. Allison owns shares of Bakewell preferred stock, which
she says provides her with a constant 9.5% rate of
return. The stock is currently priced at $42.10 a share.
What is the amount of the dividend per share?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #268
Type: Problems

269. 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%. If you require a 10.5% rate of
return, how much are you willing to pay to purchase
one share of this stock?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #269
Type: Problems
270. 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% annually. What is the maximum
amount you should pay to purchase a share of this stock
if your goal is to earn a 12% rate of return?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #270
Type: Problems

271. 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% annually, and
you require a 14% rate of return?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #271
Type: Problems
272. 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%?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #272
Type: Problems

273. Elegante Homes stock traditionally provides a 16% rate

of return. The company just paid an annual dividend of
$3.20 a share and is expected to increase that amount
by 5% 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% at the time of your purchase?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #273
Type: Problems
274. 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% return on your equity investments?

A.
B.
C.
D.
E.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #274
Type: Problems

275. 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% rate of
return. What is the maximum amount you are willing to
pay for one share of this stock today?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #275
Type: Problems
276. 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% annually and expects to continue
doing so. What is the market rate of return on this
stock?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #276
Type: Problems

277. The current yield on Martin's Mills common stock is

3.6%. 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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #277
Type: Problems
278. Lake Shore Vineyards recently paid a $4.20 annual
dividend on their common stock. This dividend
increases at an average rate of 4.2% per year. The stock
is currently selling for $80.65 a share. What is the
market rate of return?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #278
Type: Problems

279. Shares of common stock of the Windy Farms offer an

expected total return of 13.8%. The dividend is
increasing at a constant 4.2% per year. What is the
dividend yield?

A.
B.
C.
D.
E.

Dividend yield = .138 - .042 = 9.6%

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #279
Type: Problems
280. The common stock of Jesup's returned a nifty 24.6%
rate of return last year. The dividend amount was $0.40
a share which equated to a dividend yield of 0.6%.
What was the rate of price appreciation for the year?

A.
B.
C.
D.
E.

g = .246 - .006 = .24 = 24.0%

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #280
Type: Problems

281. RTF, Inc. common stock sells for $22 a share and pays
an annual dividend that increases by 3.8% annually.
The market rate of return on this stock is 8.2%. What is
the amount of the last dividend paid?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #281
Type: Problems
282. The Home Market has adopted a policy of increasing
the annual dividend on their common stock at a
constant rate of 3.75% annually. The firm is paying an
annual dividend of $1.10 today. What will the dividend
be five years from now?

A.
B.
C.
D.
E.

D5 = $1.10 × (1.0375)5 = $1.32

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #282
Type: Problems

283. You have decided you would like to own some shares
of the Clean Coal Company but need a 16% rate of
return to compensate for the perceived risk of such
ownership. What is the maximum you are willing to
spend per share to buy this stock if the company pays a
constant $1.75 annual dividend per share?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #283
Type: Problems
284. The Herb Garden common stock sells for $43.70 a
share and has a market rate of return of 11.6%. The
company just paid an annual dividend of $1.42 per
share. What is the dividend growth rate?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #284
Type: Problems

285. KB Adventures will pay an annual dividend of $3.15 a

share on their common stock next week. Last year, the
company paid a dividend of $3.00 a share. The
company adheres to a constant rate of growth dividend
policy. What will one share of this common stock be
worth ten years from now if the applicable discount rate
is 12.5%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #285
Type: Problems
286. Tom's Health Clinic just paid a $4.40 annual dividend.
The company has a policy of increasing the dividend by
4% annually. You would like to purchase 100 shares of
stock in this firm but realize that you will not have the
funds to do so for another two years. If you require a
14% rate of return, how much will you be willing to
pay for the 100 shares when you can afford to make this
investment?

A.
B.
C.
D.
E.

Purchase cost =
100 × $49.49 = $4,949

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #286
Type: Problems

287. Franktown Meats just announced that they are

increasing the annual dividend to $1.75 and establishing
a policy whereby the dividend will increase by 2%
annually thereafter. How much will one share of this
stock be worth six years from now if the required rate
of return is 14.5%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #287
Type: Problems
288. Shares of Do Naught common stock are currently
selling for $46.90. The last dividend paid was $2.21 per
share and the market rate of return is 15.8%. At what
rate is the dividend growing?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #288
Type: Problems

289. Cellular Talk is a new firm in a rapidly growing

industry. The company is planning on increasing its
annual dividend by 25% a year for the next three years
and then decreasing the growth rate to 6% per year. The
company just paid its annual dividend in the amount of
$0.80 per share. What is the current value of one share
of this stock if the required rate of return is 17%?

A.
B.
C.
D.
E.

Dividends for the next 3 years are: $1.00, $1.25, and

$1.5625.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #289
 Type: Problems

290. J&J Exporters paid a $1.80 per share annual dividend

last month. The company is planning on paying $2.00,
$2.50, $2.75, and $3.00 a share over the next four years,
respectively. After that the dividend will be constant at
$3.20 per share per year. What is the market price of
this stock if the market rate of return is 13%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #290
Type: Problems
291. The Slim Waist announced today that they will begin
paying annual dividends. The first dividend will be paid
next year in the amount of $.35 a share. The following
dividends will be $.40, $.55, and $.70 a share annually
for the following three years, respectively. After that,
dividends are projected to increase by 2.5% per year.
How much are you willing to pay to buy one share of
this stock if your desired rate of return is 12%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #291
Type: Problems
292. Gloria's Boutique of Ottawa recently paid $1.65 as an
annual dividend. Future dividends are projected at
$1.68, $1.72, $1.76, and $1.80 over the next four years,
respectively. Beginning five years from now, the
dividend is expected to increase by 2.5% annually.
What is one share of this stock worth to you if you
require an 11% rate of return on similar investments?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #292
Type: Problems
293. Bliley Plumbers pays no dividend at the present time.
The company plans to start paying an annual dividend
in the amount of $0.20 a share for three years
commencing three years from today. After that time, the
company plans on paying a constant $1 a share
dividend indefinitely. How much are you willing to pay
to buy a share of this stock if your required return is
15%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #293
Type: Problems
294. Simplicity is a relatively new firm that appears to be on
the road to great success. The company paid their first
annual dividend yesterday in the amount of $0.15 a
share. The company plans to double each annual
dividend payment for the next four years. After that
time, they are planning on paying a constant dividend
of $2.50 per share indefinitely. What is one share of this
stock worth today if the market rate of return on similar
securities is 13.45%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #294
Type: Problems
295. Home Builders, Inc. is a very cyclical type of business
which is reflected in their dividend policy. The firm
pays a $3.50 per share dividend every other year. The
last dividend was paid last year. Four years from now,
the company plans to pay a $77 liquidating dividend
per share. What is the current market value of this stock
if the market rate of return is 18.5%?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #295
Type: Problems

296. Super Sounds is expecting a period of intense growth

and has decided to retain more of their earnings to help
finance that growth. As a result, they are going to
reduce the annual dividend by 20% a year for the next
three years. After that they will maintain a constant
dividend of $1 a share. Last year, the company paid
$2.25 as the annual dividend per share. What is the
market value of this stock if the required rate of return
is 16%?

A.
B.
C.
D.
E.

Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #296
 Type: Problems

297. Shirley's Cool Treats is expecting their ice cream sales

to decline due to the increased interest in healthy eating.
Thus, the company has announced that they will be
reducing their annual dividend by 4% a year for the
next four years. After that, they will maintain a constant
dividend of $1 a share. Last year, the company paid
$1.80 per share. What is this stock worth to you if you
require a 12% rate of return?

A.
B.
C.
D.
E.

Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #297
Type: Problems

298. The preferred stock of West Coast Limited pays an

annual dividend of $5.50 and sells for $52 a share.
What is the rate of return on this security?

A.
B.
C.
D.
E.

R = $5.50/$52.00 = 10.58%

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #298
Type: Problems
299. Stu owns shares of Markley preferred stock which he
says provides him with a constant 13.6% rate of return.
The stock is currently priced at $51.47 a share. What is
the amount of the dividend per share?

A.
B.
C.
D.
E.

D = .136 × $51.47 = $7.00

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #299
Type: Problems

300. Stocks are different from bonds because

___________________.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #300
Type: Concepts

301. A characteristic of public corporations is to allocate a

portion of their earnings to shareholders through
_______________.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #301
Type: Concepts
302. You want to invest in a stock that pays $6.00 annual
cash dividends for the next five years. At the end of the
five years, you will sell the stock for $30.00. If you
want to earn 10% on this investment, what is a fair
price for this stock if you buy it today?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #302
Type: Problems
303. Kwak Motors Inc. pays quarterly dividends of $2.00
dividend and will maintain this policy forever. What
price should you pay for one share of preferred stock if
you want an annual return of 9.5% on your
investment?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #303
Type: Problems
304. The next dividend is expected to be $1.80, growth rate
is 6%, and the required rate of return is 13%. What is
the stock price?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #304
Type: Problems
305. Sedge Inc. has a 12% required rate of return. It does not
expect to pay dividends for seven years. At the end of
year 8, it will pay $2.00 per share in dividends. At that
time, Sedgwick expects its dividends to grow at 7%
forever. Calculate the stock price now.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #305
Type: Problems

306. Dividend models suggest that ____________ determine

the value of a financial asset to which the owner is
entitled while holding the asset.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #306
 Type: Concepts

307. 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?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #307
Type: Problems
308. City Corp. is experiencing rapid growth. Dividends are
expected to grow at 20% per year during the next three
years, 10% over the following year, and then 4% per
year indefinitely. The required return on this stock is
10%. What is the projected stock price for the coming
year, if it just paid a $2 dividend?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #308
Type: Problems
309. Chahal Corporation is expected to pay dividends of
$12, $9, $6, and $3 over the next four years. The
company plans to maintain a constant 4% growth rate
in dividends afterwards. If the required return on the
stock is 11%, what is the current share price?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #309
Type: Problems
310. Holdom Corporation's next dividend will be $2.45 per
share. The company will increase its dividend 20% the
year after and will then reduce its dividend growth rate
by 5 percentage points per year until it reaches the
industry average of 5% dividend growth, after which
the company will keep a constant growth rate forever. If
the required return for investors is 11%, what will a
share of stock sell for today?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #310
Type: Problems
311. NanTech Corporation's next dividend is expected to be
$1.75. Dividend growth has been a consistent 7% per
year. If investors want a 12% return, determine the
stock price 5 years ago.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #311
Type: Problems
312. Talon Corp. just paid a dividend of $1.50 per share. The
dividends are expected to grow at 20% for the next
eight years and then level off to a 5% growth rate
indefinitely. If the required return is 12%, what is the
price of the stock today?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #312
Type: Problems
313. Talon Corp. just paid a dividend of $1.50 per share. The
dividends have been growing at 5% per year. If the
required return is 12%, what was the price of the stock
three years ago?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #313
Type: Problems
314. Holdom Corporation's next dividend will be $2.45 per
share. The company will increase its dividend 20% the
year after and will then reduce its dividend growth rate
by 5 percentage points per year until it reaches the
industry average of 5% dividend growth, after which
the company will keep a constant growth rate forever. If
the required return for investors is 11%, what will a
share of stock sin year 2?

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #314
Type: Problems
315. List and briefly explain the three special cases in which
we can come up with a value for a share of stock.

The three cases are: zero growth, constant growth, and

cases where the dividend grows at a constant rate after
some length of time. The zero growth case is a simple
perpetuity, the constant growth case is a straightforward
application of the dividend growth model, and the third
case requires using the non-constant dividend growth
model.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #315
Type: Essay

316. Consider a share of stock that pays a dividend of $1 at

the end of one year, $2 at the end of two years, and then
dividends grow at a constant rate of 5% per year
thereafter. If the required return is 10%, we can value
this share of stock by finding P2 using D3, then find P0 =
D1/(1.1) + D2/(1.1)2 + P2/(1.1)1. In this formula, it
appears as though we ignore all dividends from year
three on. Why is this so?

We actually don't ignore any dividends. When we

compute (P2 we incorporate dividend number three, but
also all dividends from that point forward) Thus, we
have included all dividends in the stock valuation,
which is required in order to determine the value of a
share.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #316
Type: Essay
317. What are the components of the required rate of return
on a share of stock? Briefly explain each.

The two components are dividend yield, which

measures the annual percentage income return on the
stock, and the capital gains yield, which is the
percentage price appreciation (or depreciation) of the
stock.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #317
Type: Essay

318. Briefly explain the differences between preferred and

common stock.

Common stockholders have the right to vote on

corporate matters and have the right to receive the
residual value of the firm after all liabilities and
preferred stockholders are paid in a liquidation.
Preferred stockholders have a promised dividend, may
or may not have the right to collect dividends that have
been passed, and preferred stock will typically be rated
much like bonds. In a liquidation, preferred
shareholders have a preference over common
stockholders.

Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #318
Type: Essay
319. Explain whether it is easier to find the required return
on a publicly traded stock or a publicly traded bond,
and explain why?

Bonds, unlike stocks, have a final maturity date and

promised payments at fixed periods of time. For stocks,
the only valuation model we have up to this point in the
text is the dividend growth model which requires
estimation of a dividend growth rate and also requires
that certain conditions be met before the dividend
growth model can be applied. Normally, all of the
information required to find the yield on a publicly
traded bond is publicly available while only the price
and most current dividend are available for stocks.

Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #319
Type: Essay

320. A number of publicly traded firms pay no dividends yet

investors are willing to buy shares in these firms. How
is this possible? Does this violate our basic principle of
stock valuation? Explain?

Our basic principle of stock valuation is that the value

of a share of stock is simply equal to the present value
of all of the expected dividends on the stock. According
to the dividend growth model, an asset that has no
expected cash flows has a value of zero, so if investors
are willing to purchase shares of stock in firms that pay
no dividends, they evidently expect that the firms will
begin paying dividends at some point in the future.

Difficulty: Intermediate
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #320
Type: Essay
321. A firm has two classes of common stock outstanding:
Class A, which carries voting rights of 10 votes per
share but receives no dividends (ever), and Class B,
which carries voting rights of one vote per share and
pays dividends whenever they are declared by the
board. Which would you be willing to pay more for and
why?

This is a very open-ended question to get the students

thinking about the differing interests of investors.
Management of the firm would likely prefer Class A
while investors interested in dividends would likely
prefer Class B shares. The Class B shares with their
ordinary voting rights and dividends can be valued
using the dividend growth model but the Class A shares,
whose value is derived completely from the voting
rights, would be very difficult to value.

Difficulty: Challenge
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #321
Type: Essay

322. A firm has common and preferred stock outstanding,

both of which just paid a dividend of $3 per share.
Which do you think will have a higher share price and
why? If the firm also has an issue of non-callable
debentures outstanding, which do you think investors
will require a higher return on, the debentures or the
shares of common stock? Explain.

This question sets up some of the material addressed

later in the chapter. First, the share of common stock
will be worth more since dividends will typically be
expected to increase while they will not on the
preferred shares. The investor-required return will be
higher for the stock since bonds have promised
payments and preference over stock in liquidation. The
astute student will make the connection that bondholder
returns are effectively limited while stockholder returns
are effectively not.

Difficulty: Challenge
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #322
Type: Essay
323. Explain how supernormal growth of dividends is
possible, but only in the short-term.

Supernormal growth is often associated with young,

rapidly growing firms which have not previously paid a
dividend. When these firms begin to pay dividends, the
amount is often small. Therefore, it only requires a
small increase in the dividend amount to equate to a
large increase in percentage terms. As the dividend
amount increases, the same percentage increase would
cost significantly more in dollar terms. For example, a
$0.05 increase to a $0.10 dividend is a 50% increase.
For a $2.00 dividend to increase by 50%, the dividend
amount would have to rise by $1.00. It is a lot easier to
afford a $0.05 increase than a $1.00 increase. Thus,
firms cannot afford too many years of supernormal
growth.

Difficulty: Intermediate
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #323
Type: Essay

324. Explain the logic behind the dividend growth model.

The current value of a stock is equal to the present

value of the future income derived from that stock. For
stocks which pay dividends, the future income stream is
measured by the amount of the next dividend and the
expected future increases in those dividends. These
dividends are then discounted based on each investor's
required rate of return to determine the present value of
the stock to that investor.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #324
Type: Essay
325. Explain why preferred stock is similar to debt.

Preferred stock pays a constant amount, may be

callable, may be convertible into common stock, may
have a credit rating, may have a sinking fund, and has
no voting rights. These are characteristics also found in
debt securities.

Difficulty: Basic
Learning Objective: 08-02 The characteristics of common and preferred stocks.
Ross - Chapter 08 #325
Type: Essay

326. Give an example of a firm which might offer a

supernormal dividend growth rate for a stated period of
time.

Student answers will vary but the most common

example may be that of a firm which is just beginning
to pay dividends. The firm may start with a small
amount, such as $.10 a share and increase the dividend
at a high rate until the dividend reaches the desired
long-term level. An increase from $.10 to $.15 a share
is a 50% increase.

Difficulty: Basic
Learning Objective: 08-01 How stock prices depend on future dividends and dividend growth.
Ross - Chapter 08 #326
Type: Essay
Chapter 08 Stock Valuation Summary