FIN 300 Final Exam

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which of the following statements is correct about both dollar return and the percentage return on a stock?

the dollar return is dependent on the size of the investment while the percentage return is not.

the higher the expected the rate of return..

the wider the distribution of returns

what is the most apt to have the largest risk premium in the future based on the historical record for 1926-2008?

small-company stocks

the lower the standard deviation of return on a security, the ____ the expected rate of return and the ____ the risk.

lower, lower

the standard deviation measures the ___ of a security's return over time.

volatility

one year ago, you purchased 400 shares of stock for $12/share. the stock pays $.22 a share in dividends each year. today, you sold your shares for $28.30/share. what is your total dollar return on this investment?

total dollar return= # of shares you purchased * (what you sold your shares for today - what you paid for one share a year ago + the dividend).
400* ($28.30-$12+.$22)= $6,608

one year ago, you bought a stock for $36.48 a share. you received a dividend of $1.62/share last month and sold the stock today for $40.18. what is the capital gains yield on the investment?

capital gains yield= (end price-beg price)/ beg price
(40.18-36.48)/36.48= 10.14

neal purchased 3,600 shares of stock for $101,124. today, he sold those shares for $26.60/share. what is the total return on investment if the dividend yield is 1.7%.

purchase price=what you paid for stock/# of shares
total return= [(purchase price-what you sold stock for today/what you sold stock for today]+dividend

purchase price= 101,124/3600=28.09
total return= [(26.60-28.06)/28.09}+.017=-3.60

over the last 5 years, a stock returned 8.3%, -32.5%, -2.2%, 46.9%, and 11.8%. what is the variance of these returns?

average return= add all up then divide by number of returns
variance= [(return-ave. return)^2 + (return-ave. return)^2 (etc)] * 4

ave. return= (.083-.325-.022+.0469_.118)/5= .0649
variance=.081504

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns?

Average return = (0.14 - 0.03 + 0.08 + 0.21 - 0.16 + 0.04)/6 = 0.046667
for standard deviation take the variance and raise it to .5

You purchased 1,300 shares of LKL stock 5 years ago and have earned annual returns of 7.1 percent, 11.2 percent, 3.6 percent, -4.7 percent and 11.8 percent. What is your arithmetic average return?

Arithmetic average = (0.071 + 0.112 + 0.036 - 0.047 + 0.118)/5 = 5.80 percent

The common stock of Western Hill Farms has yielded 16.3 percent, 7.2 percent, 11.8 percent, -3.6 percent, and 9.9 percent over the past five years, respectively. What is the geometric average return?

Geometric average return = (1.163 × 1.072 × 1.118 × 0.964 × 1.099)^(1/5 )− 1 = 8.11 percent

The average compound return earned per year over a multi-year period is called the _____ average return

geometric

The return earned in an average year over a multi-year period is called the _____ average return.

arithmetic

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

efficient capital market

Which one of the following types of securities has no priority in a bankruptcy proceeding?

common stock

Newly issued securities are sold to investors in which one of the following markets?

primary

The price of a stock at year 4 can be expressed as:

D5/(R-g).

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following 3 years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7?

($1.10) (1.08)3 (1.02)4

Taylor Tools is a young start-up company. No dividends will be paid on the stock over the next 7 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a $9 per share dividend in year 8 and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price?

P7 = $9/(0.12 - 0.04) = $112.50
P0 = $112.50/(1 + 0.12)^7 = $50.89

Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the current share price?

P4 = ($1.80 × 1.04)/(0.14 - 0.04) = $18.72
P0 = ($5/1.14) + ($12/1.142) + ($18/1.143) + [($1.80 + $18.72)/1.1 44] = $37.92

If shareholders are granted a preemptive right they will:

have priority in the purchase of any newly issued shares.

A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount?

dividend= return X price of stock
dividend=.15655 X 48.20-$7.54

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

Dividend growth model

Keller Metals common stock is selling for $36 a share and has a dividend yield of 3.2 percent. What is the dividend amount?

Dividend = 0.032 × $36 = $1.15

The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

P = $1.25/0.15 = $8.33

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?

P0 = $1.90/(0.12 - 0.035) = $22.35
P3 = [$1.90 × (1.035)^3]/(0.12 - 0.035) = $24.78
Capital gain = $24.78 − $22.35 = $2.43

Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?

P0 = ($0.90 × (1 - 0.05)/[0.15 − (-0.05] = $4.28

Kate could not attend the last shareholders meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's shares were voted?

proxy

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.28 per share on its stock. The dividends are expected to grow at a constant rate of 7 percent per year indefinitely.
Required:
(a)
If investors require a 12 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price?

$27.39

The constant dividend growth model is:
Pt = Dt × (1 + g) / (R - g)
So the price of the stock today is:
P0 = D0 (1 + g) / (R - g) = $1.28 (1.07) / (.12 - .07) = $27.39

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.28 per share on its stock. The dividends are expected to grow at a constant rate of 7 percent per year indefinitely.
What will the price be in 11 years?
$57.66

We can do the same thing to find the dividend in Year 12, which gives us the price in Year 11, so:
P11 = D11 (1 + g) / (R - g) = D0 (1 + g)12 / (R - g) = $1.28 (1.07)12 / (.12 - .07) = $57.66

Metroplex Corporation will pay a $5.10 per share dividend next year. The company pledges to increase its dividend by 3.10 percent per year indefinitely.

Required:
If you require an 5.90 percent return on your investment, how much will you pay for the company's stock today?

P0 = D1 / (R- g) = $5.10/(.059 - .031) = $182.14

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

The next dividend payment by Blue Cheese, Inc., will be $1.89 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $38 per share, what is the required return?

R = (D1 / P0) + g = ($1.89 / $38.00) + 0.05 = 0.0997, or 9.97%

willingness to pay for stock today

[paid price*(1+ increase in dividend)]/(rate of return-dividend)

total return

[(end price-beg price)+dividend]/beg price

dividend yield

pad dividend/beg price

capital gains yield

(end price-beg price)/beg price

stock price

dividend/(rate of return-increase of dividend

required return

dividend/required rate

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