FINC 301 Exam 3 (Ch.8-12) || A+ Guaranteed.
Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount
indefinitely. If Matilda's cost of capital is 12%, what would Matilda's stock price be expected to
be? correct answers This is the classic zero-growth dividend case, which can be solved as a
perpetuity: P = D/R
= $2.25/.12
=$18.75
Staal Securities will pay a dividend of $3.40 next year. The company promises to increase its
dividend by 4.5% per year indefinitely. If you require a return of 11.0% on your investments,
how much would you be willing to pay for the stock today? correct answers This is the classic
dividend growth model, where next year's dividend is given, and can be solved:
P = D1 / (R - g)
= $3.40 / (.11 - .045)
= $3.40 / (.065)
= $52.31
The Jackson-Timberlake Wardrobe Company just paid a dividend of $1.45 per share on its
common stock. The dividends are expected to grow at a rate of 6% per year indefinitely. If
investors require a return of 11% on the stock, what is the current price? correct answers This is
the classic dividend growth model, but where you have to calculate next year's dividend:
P = D0 x (1 + g) / (R - g)
This year's dividend is $1.45. Next year's dividend will be 6% higher,
or $1.45 x (1.00 + .06), or $1.54.
P = D0 x (1 + g)/ (R - g)
= $1.45 x (1 + .06) / (.11 - .06)
= $1.54 / (.05)
= $30.80
Monty Company has a current stock price of $88.33. The dividend next year will be $2.65. The
future growth rate in dividends is 5.0%. What is the required return? correct answers This is the
dividend growth model, where we are solving for R:
P = D1 / (R - g)
$88.33 = $2.65 / (R - .05)
($88.33)(R - .05) = ($2.65)(R - .05) / (R - .05)
$88.33R - $4.42 = $2.65
$88.33R - $ 4.42 + $4.42 = $2.65 + $4.42
$88.33R = $7.07
R = $7.07/ $88.33
R = 8.00%
, Best Bagel Bakers, Inc. has a current stock price of $29.44. The dividend next year will be $2.00.
The required return is 14.0%. What is the future dividend growth rate? correct answers This is
the dividend growth model, where we are solving for g:
P = D1 / (R - g)
$29.44 = $2.00 / (.14 - g)
($29.44)(.14 - g) = ($2.00)(.14 - g) / (.14 - g)
$4.12 - $29.44g = $2.00
$4.12 - $4.12 - $29.44g = $2.00 - $4.12
-$29.44g = -$2.12
g = -$2.12 / -$29.44
g = 7.20%
On a particular date, FEDEX has a stock price of $88.66 and earnings per share of $6.34. Its
closest competitor, UPS, has earnings per share of $.40. Assuming all other things equal, what is
the best estimate of the stock price of UPS on this date? correct answers The FEDEX
price/earnings multiple is $88.66/$6.34 = 13.98x
Applying this P/E multiple to UPS's earnings gives:
$.40 x 13.98 = $5.59
What are the two ways that shareholder votes for members of the Board of Directors can be
voted/counted? correct answers · Straight voting
· Cumulative voting
What is a "proxy"? correct answers A proxy is a grant of authority by a shareholder, which grant
allows
another individual to vote his/her shares, either as directed, or as the
designated individual wishes.
What is a "hostile takeover"? correct answers A hostile takeover occurs when dissident
shareholders or outsiders replace current management, against the wishes of that management.
What are the four ways that a shareholder may cast his/her vote? correct answers · In person
· Telephone
· On-line
· By mail
What are the five bond-like features of preferred stock? correct answers · Stated value per share
· Fixed dividend rate
· Credit ratings
· Convertible
· Callable
What are the three major U.S. stock exchanges? correct answers · New York Stock Exchange
· NASDAQ
· OTC Markets Group
Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount
indefinitely. If Matilda's cost of capital is 12%, what would Matilda's stock price be expected to
be? correct answers This is the classic zero-growth dividend case, which can be solved as a
perpetuity: P = D/R
= $2.25/.12
=$18.75
Staal Securities will pay a dividend of $3.40 next year. The company promises to increase its
dividend by 4.5% per year indefinitely. If you require a return of 11.0% on your investments,
how much would you be willing to pay for the stock today? correct answers This is the classic
dividend growth model, where next year's dividend is given, and can be solved:
P = D1 / (R - g)
= $3.40 / (.11 - .045)
= $3.40 / (.065)
= $52.31
The Jackson-Timberlake Wardrobe Company just paid a dividend of $1.45 per share on its
common stock. The dividends are expected to grow at a rate of 6% per year indefinitely. If
investors require a return of 11% on the stock, what is the current price? correct answers This is
the classic dividend growth model, but where you have to calculate next year's dividend:
P = D0 x (1 + g) / (R - g)
This year's dividend is $1.45. Next year's dividend will be 6% higher,
or $1.45 x (1.00 + .06), or $1.54.
P = D0 x (1 + g)/ (R - g)
= $1.45 x (1 + .06) / (.11 - .06)
= $1.54 / (.05)
= $30.80
Monty Company has a current stock price of $88.33. The dividend next year will be $2.65. The
future growth rate in dividends is 5.0%. What is the required return? correct answers This is the
dividend growth model, where we are solving for R:
P = D1 / (R - g)
$88.33 = $2.65 / (R - .05)
($88.33)(R - .05) = ($2.65)(R - .05) / (R - .05)
$88.33R - $4.42 = $2.65
$88.33R - $ 4.42 + $4.42 = $2.65 + $4.42
$88.33R = $7.07
R = $7.07/ $88.33
R = 8.00%
, Best Bagel Bakers, Inc. has a current stock price of $29.44. The dividend next year will be $2.00.
The required return is 14.0%. What is the future dividend growth rate? correct answers This is
the dividend growth model, where we are solving for g:
P = D1 / (R - g)
$29.44 = $2.00 / (.14 - g)
($29.44)(.14 - g) = ($2.00)(.14 - g) / (.14 - g)
$4.12 - $29.44g = $2.00
$4.12 - $4.12 - $29.44g = $2.00 - $4.12
-$29.44g = -$2.12
g = -$2.12 / -$29.44
g = 7.20%
On a particular date, FEDEX has a stock price of $88.66 and earnings per share of $6.34. Its
closest competitor, UPS, has earnings per share of $.40. Assuming all other things equal, what is
the best estimate of the stock price of UPS on this date? correct answers The FEDEX
price/earnings multiple is $88.66/$6.34 = 13.98x
Applying this P/E multiple to UPS's earnings gives:
$.40 x 13.98 = $5.59
What are the two ways that shareholder votes for members of the Board of Directors can be
voted/counted? correct answers · Straight voting
· Cumulative voting
What is a "proxy"? correct answers A proxy is a grant of authority by a shareholder, which grant
allows
another individual to vote his/her shares, either as directed, or as the
designated individual wishes.
What is a "hostile takeover"? correct answers A hostile takeover occurs when dissident
shareholders or outsiders replace current management, against the wishes of that management.
What are the four ways that a shareholder may cast his/her vote? correct answers · In person
· Telephone
· On-line
· By mail
What are the five bond-like features of preferred stock? correct answers · Stated value per share
· Fixed dividend rate
· Credit ratings
· Convertible
· Callable
What are the three major U.S. stock exchanges? correct answers · New York Stock Exchange
· NASDAQ
· OTC Markets Group
