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FINC Test 3 - Chapter 7
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Terms in this set (30)
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
The dividend yield is defined as:
next year's expected cash dividend divided by the current market price per share.
The capital gains yield equals which one of the following?
Dividend growth rate
Dividends are best defined as:
cash or stock payments to shareholders.
Which one of the following will increase the current value of a stock?
Increase in the capital gains yield
The price of a stock at year 4 can be expressed as:
D5/(R - g)
Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated
dividend for year 5 if the firm increases its dividend by 2 percent annually?
$1.50 × (1.02)^4
The required return on a stock is equal to which one of the following if the dividend on the stock
decreases by 1 percent per year?
Dividend yield + capital gains yield
Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield ____.
increased; remained constant
Which one of the following must equal zero if a firm pays a constant annual dividend?
capital gains yield
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?
Stock with a constant growth dividend
Reynolds Metals common stock is selling for $25 a share and has a dividend yield of 3.1 percent. What is the dividend amount?
$25 * 0.031 = $0.78
The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?
D5 = 2.20(1.028)^5 = $2.53
The Waffle 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 25 percent rate of return?
$1.25/0.25 = $5.oo
Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share. What is the rate of return?
R = $1.60/$28.50 = 5.61%
Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 12 percent. What is the dividend growth rate?
g = R - (D1/Po)
g = 0.12 - ($1.58/$18.53) = 3.47%
Horseshoe Stables 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 10 percent annually. What is a share of this stock worth today at a required return of 15 percent?
D1 = $0.9(1-0.1) = $0.84
Po = D1/(R-g)
Po = $0.84/(0.15+0.1) =
$3.24
Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid?
Do = Po(R-g)/(1+g)
D0 = $28.40(0.14-0.015)/(1.015) = $3.50
Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterward, 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?
$37.92
-See Study Guide
A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is the dividend amount?
$48.20 * 0.1565 = $7.54
Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.5 percent?
Do = $55(0.032) = $1.76
R = [Do(1+g)/Pt]+g
R = [($1.76(1.025)/$41]+0.025 =6.90%
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now. Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?
$7.70
Venus, Inc. has an issue of preferred stock outstanding that pays a $9.00 dividend every year, in perpetuity. If this issue currently sells for $164.60 per share, what is the required return?
$9.00/$164.60 = 5.47%
Charles Berkeley, Inc. just paid an annual dividend of $3.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years?
Po=P2/(R-g)
P2=$3.60(1.045)^13
Po=[$3.60(1.045)^13]/(0.11-0.045) = $98.15
The next dividend payment by Swenson, Inc. will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?
R = (1.80/48.50)+0.055 = 9.21%
Suppose you know that a company's stock currently sells for $75 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
DY = 14%/2 = 0.07
D1 = $75(0.07) = $5.25
Do=$5.25/1.07=$4.91
A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?
$2.40/$46.10=5.21%
stock has paid dividends of $1.80, $1.85, $2.00, $2.20, and $2.25 over the past five years, respectively. What is the average capital gains yield?
5.79 percent
-See Study Guide
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 15 percent?
$33.93
-See Study Guide
A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent?
$20.50
-See Study Guide
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