FIN 313 - Ch. 8 Vocab

Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If the risk-free rate is 3% and investors' risk premium on this stock is 8%, estimate the value of Wallace Industries stock 2 years from now.

$106.84

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

false, because the required return could be different

A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporation's stock price, however, is $1 per share. Which of the following statements is MOST correct?

Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.

You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday. You expect this stock to have a growth rate of 15 percent for the next 3 years, resulting in dividends of

D1 = $2.30, D2 = $2.645, D3 = $3.04. The long-run normal growth rate after year 3 is expected to be 10 percent (that is, a constant growth rate after year 3 of 10% per year forever). If you require a 14 percent rate of return, how much should you be willing to pay for this stock?

$62.57

Consider the following four types of payments that could be made by a normal operating firm: interest, common dividends, income taxes, and preferred dividends. Compared to the other payments mentioned, where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?

fourth

Asymmetric Frames Corp. had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its profit-retention rate was 60%. If these relationships continue, what will be United Financial Corp.'s internal growth rate?

9.0%

LTM, Inc. has an issue of preferred stock whose par value is $1,000. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for?

$818.18

Who bears the greatest risk of loss of value if a firm should fail?

common stockholders

ACME, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is

$20.83.

Which of the following statements concerning the constant growth dividend valuation model is true?

The required rate of return must exceed the growth rate.

Shackleford Corporation net income this year is $800,000. The company generally retains 35% of net income for reinvestment. The company's common equity currently has a book value of $5,000,000. They just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.

$22.61

LED Corp.'s common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If LED's current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock?

No, the stock is overpriced.

A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years. The announcement of the contract will

cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase.

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

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

Maynard Inc. preferred stock pays an annual dividend of $7 per share. Which of the following statements is true for an investor with a required return of 9%?

The value of the preferred stock is $77.78 per share.

Which of the following statements concerning the required rate of return on stocks is true?

The higher the risk, the higher the required return, other things being equal.

Nogrowth Corporation expects their dividend to stay at $0.50 per share each year into the foreseeable future. Therefore

the value of the stock can be estimated as $0.50 divided by an investor's required rate of return.

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

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

Kinard's Kennels Inc. ROE is 20%. Their dividend payout ratio is 70%. The last dividend, just paid, was $2.00. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of Kinard's common stock if its required return is 18%?

$17.67

How is preferred stock similar to bonds?

Preferred stockholders receive a dividend payment (much like interest payments to bondholders) that is usually fixed.

Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever, the increase in the value of the stock each year should be equal to the

growth rate in dividends, g.

TC Corp. paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If TC Corp. stock is selling for $50.00 per share, the stockholders' expected rate of return is

17.15%.

A financial analyst expects Crane Service Inc. to pay a dividend of $2 per share one year from today, a dividend of $3 per share in years two, and estimates the value of the stock at the end of year two to be $22. If your required return on Crane Service stock is 14 %, what is the most you would be willing to pay for the stock today if you plan to sell the stock in two years?

$20.99

How is preferred stock affected by a decrease in the required rate of return?

The value of a share of preferred stock increases.

Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%?

$5.00

Which of the following is NOT true regarding common stock?

Dividend payments, like interest payments, are fixed.

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way, and if your required rate of return is 16% per year, how much is the stock worth today?

$48.05

The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following, where D1 is the next dividend and Vc is the current value of the stock?

D1/Vc+ g

An example of the growth factor in common stock for the original investors is

retaining profits in order to reinvest into the firm.

Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson's current market price is $40.00, what is the stock's expected rate of return (nearest .01 percent)?

19.00%

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

11.81%

Which of the following changes will make the value of a stock go up, other things being held constant?

The required return decreases.

Minority shareholders have a greater chance of electing a member to the board of directors if the company uses

cumulative voting.

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?

cumulative

Bevel Building Products, Inc., whose common stock is currently selling for $12 per share, is expected to pay a $1.80 dividend, and sell for $14.40 one year from now. What are the dividend yield, growth rate, and total rate of return, respectively?

15%; 20%; 35%

Shasta Co. just paid a dividend of $1.65 (D0) on its common stock. This company's dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value per share of Shasta stock.

$21.24

You observe Thundering Herd Common Stock selling for $40.00 per share. The next dividend is expected to be $4.00, and is expected to grow at a 5% annual rate forever. If your required rate of return is 12%, should you purchase the stock?

Yes, because the present value of the expected future cash flows is greater than $40.

Which of the following features, or benefits, belong to a firm's common stockholders?

all of the above

What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

the preemptive right

Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return? (Round your answer to the nearest .1% and assume that there are no transaction costs.)

21.8%

Cumulative preferred stock

requires dividends in arrears to be carried over into the next period.

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision?

callable

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

$22.22

Castle, Inc. paid a dividend yesterday of $2 per share. Castle management expects the dividend to increase next year to $3. If the dividend is expected to stay at $3 per year for the foreseeable future, what is the value of the stock to an investor with a required rate of return of 10%?

$30.00

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

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

How is preferred stock similar to common stock?

Investors cannot sue a corporation for the non-payment of dividends.

What is the value of a preferred stock that pays a $5.55 dividend to an investor with a required rate of return of 10%?

$55.50

Which of the following statements concerning preferred stock is MOST correct?

Preferred stock dividends are typically the same each year, allowing a preferred stock to be valued as a perpetuity.

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?

sinking fund

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

$30.80