Finance Stocks Practice

Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct?

a. The two stocks have the same dividend yield.

b. If the stock market were efficient, these two stocks should have the same price.

c. If the stock market were efficient, these two stocks should have the same expected return.

d. Statements a and c are correct.

e. All of the statements above are correct.

A

The Jones Company has decided to under¬take a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpe¬tual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

a. $150

b. $100

c. $ 50

d. $ 25

e. $ 10

D

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

a. $164.19

b. $ 75.29

c. $107.53

d. $118.35

e. $131.74

D

Allegheny Publishing's stock is expected to pay a year-end dividend, D1, of $4.00. The dividend is expected to grow at a constant rate of 8 percent per year, and the stock's required rate of return is 12 percent. Given this information, what is the expected price of the stock, eight years from now?

a. $200.00

b. $185.09

c. $171.38

d. $247.60

e. $136.86

B

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

a. $57.50

b. $62.25

c. $71.86

d. $64.00

e. $44.92

A

Albright Motors is expected to pay a year-end dividend of $3.00 a share (D1 = $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?

a. 13.00%

b. 10.05%

c. 6.00%

d. 5.33%

e. 7.00%

C

The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (ks) is 12 percent. What is the current price of Klein's common stock?

a. $21.00

b. $33.33

c. $42.25

d. $50.16

e. $58.75

D

Waters Corporation has a stock price of $20 a share. The stock's year-end dividend is expected to be $2 a share (D1 = $2.00). The stock's required rate of return is 15 percent and the stock's dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?

a. $28

b. $53

c. $27

d. $23

e. $39

A

Faulkner Corporation expects to pay an end-of-year dividend, D1, of $1.50 per share. For the next two years the dividend is expected to grow by 25 percent per year, after which time the dividend is expected to grow at a constant rate of 7 percent per year. The stock has a required rate of return of 12 percent. Assuming that the stock is fairly valued, what is the price of the stock today?

a. $45.03

b. $40.20

c. $37.97

d. $36.38

e. $45.03

B

Dawson Energy is expected to pay an end-of-year dividend, D1, of $2.00 per share, and it is expected to grow at a constant rate over time. The stock has a required rate of return of 14 percent and a dividend yield, D1/P0, of 5 percent. What is the expected price of the stock five years from today?

a. $77.02

b. $61.54

c. $56.46

d. $40.00

e. $51.05

B