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Managerial Finance > Stock > Flashcards

Stock Flashcards

1
Q

Estates Corp pays constant $7.80 dividend on this stock. The company will maintain this dividend for the next 13 years and will then cease paying the dividends forever. If the required return on this stock is 11.2 percent, what is the current share price

A

current divided $7.80
Years until dividends ceases 13
Required return 11.2%

Share Price $52.12

=PV(Required Return, Years,-Current Dividends)

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2
Q

The Jackso- Timberlake Wordrope co. just paid dividends of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4% per year indefinitely. If investors require a return of 10.5 percent on the stick, What is the current price? What will the price be in three years? In 15 years?

A 
Current Dividend    $ 1.95
Dividned Growth      4%
Required growth rate   10.5%
Price in Year       0
Price in Year       3 
Price in Year       15

Dividend in 1 year FV=(Growth rate, price year 0+1,,- current dividends) = 2.03
Price today = Dividend 1 year/ (required return-growth rate)
3 year
15 year

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3
Q

The perfect rose company has earnings of @.35 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21

A

EPS $2.35
Benchmark PE 18
Benchmark PE 21

Stock price at 18
=Benchmark PE * EPS
Stock price at 21
= benchmark PE* EPS

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4
Q

The next dividend payment Halestorm, Inc will be $2.04 The dividends are anticipated to maintain a growth of 4.5% foever. The stock currently sells for $37
per share. What is the dividends yield? what is expected capital gins or yield?

A

Dividends yield 5.51%
=Next year dividends/
Capital Gains yield 4.50%
=4.50

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5
Q

Metsllics Bearings Inc is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $14 per share dividend 10 years from today and will increase the dividend by 3.9 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price?

A

Future dividend $14.00
Years until first dividend 10
Dividend growth rate 3.9%
Required return 12.5%

Stock price in 9 days
$162.79
=future dividend/(required return-dividend growth rate)

Stock Price today
$56.40
=PV(RR,Years-1,,-stock price)

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6
Q

The voting procedure where you must control 50 percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called __________ voting.

A

Straight

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7
Q

The free cash flow model, as compared to other models, tends to be most helpful when valuing a share of stock in a

A

non-dividend-paying firm that has external financing needs.

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8
Q

NASDAQ has which one of these features?

A

Multiple market maker system

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9
Q

Alanna stock pays an annual dividend of $2.65 per share and has done so for the past seven years. No changes in the dividend amount are expected. The relevant market rate of return is 11.5 percent. Given this information, one share of this stock

A

is valued as a perpetuity.

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10
Q

The total return on a stock is equal to

A

Capital gains yield + Dividend yield.

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11
Q

A stock quote shows a last price of 41.18, a P/E of 16, and a net change of −.38. Based on this information, which one of the following statements is correct?

A

The earnings per share are equal to 1/16th of $41.18.

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12
Q

Corporate dividends

A

are taxed at the personal level even though they are paid from after-tax income.

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13
Q

Staggered elections

A

help prevent takeovers.

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14
Q

Denver Wool is owned by a group of shareholders who all vote independently and who all want personal control over the firm. There are three open seats and Danielle is one of six contenders. If straight voting is utilized and Danielle is a current shareholder, then she

A

can only be assured of her election if she owns sufficient shares to control the entire election.

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15
Q

Which one of the following statements concerning dealers and brokers in the financial markets is correct?

A

A broker never assumes ownership of the securities being traded.

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16
Q

A stock report contains the following information: P/E 18.6, closing price 17.28, dividend .65, net change .17, and an ask of 17.35 × 200. Which one of the following statements is correct given this information?

A

The closing price on the previous trading day was $17.11.

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17
Q

Based on the dividend growth model, an increase in investors’ required rate of return will

A

cause the market values of all stocks to decrease, all else held constant.

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18
Q

A stock that pays a constant annual dividend will have a market price that

A

decreases when the market rate of return increases.

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19
Q

The underlying assumption of the dividend growth model is that a stock is worth

A

the present value of the future income provided by that stock.

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20
Q

The owner of preferred stock

A

is entitled to a distribution of income prior to distribution to the common shareholders.

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21
Q

Shares of Halva Corp. stock offer an expected total return of 14.6 percent. What is the dividend yield if the dividend increases by 2.8 percent annually?

A

11.80%

Dividend yield = 14.6% − 2.8% = 11.8%

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22
Q

Ernst Electrical increases its annual dividend by 1.8 percent annually. The stock commands a market rate of return of 18 percent and sells for $19.07 a share. What is the expected amount of the next dividend?

A

$3.09

$19.07 = D1/(.18 − .018)
D1 = $3.09
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23
Q

DOC just paid a dividend of $.46 a share. The dividends are expected to increase by 30 percent a year for the next two years and then increase by 2 percent annually thereafter. What is the current value of a share if the appropriate discount rate is 15 percent?

A

$5.72

P2 = ($.46 × 1.32 × 1.02)/(.15 − .02) = $6.10
P0 = $.46 × 1.3/1.15 + [$.46 × 1.32 + $6.10]/1.152 = $5.72
24
Q

JulianCo common stock pays an annual dividend of $2.10 a share and is committed to maintaining a constant dividend. How much are you willing to pay for one share of this stock if your required return is 14 percent?

A

$15.00

P0 = $2.10/.14
P0 = $15.00
25
Q

The stock of Gonzalez Industries traditionally provides a rate of return of 11.7 percent. The company just paid an annual dividend of $2.81 per share and recently announced it will commence increasing its dividends by 3 percent each year. For this stock to return its traditional rate, what should the market price of this stock be?

A

$33.27

P0 = [$2.81 × (1 + .03)]/(.117 − .03)
P0 = $33.27
26
Q

Feltwater Furniture has 134,000 shares of stock outstanding. The firm expects to earn net income of $286,000 next year with annual increases of 4 percent per year thereafter. The firm pays out 70 percent of its net income in dividends. The required return is 16 percent. What is the share price?

A

$12.45

Price per share = .70 × $286,000/134,000/(.16 − .04) = $12.45

27
Q

Aleksov Brothers common stock sells for $36.60 a share and pays an annual dividend that increases by 1.8 percent annually. The market rate of return on this stock is 14.7 percent. What is the amount of the last dividend paid?

A

$4.64

$36.60 = (D0 × 1.018)/(.147 − .018)
D0 = $4.64
28
Q

Pavlos, Inc., is expecting a period of intense growth, so it has decided to reduce its annual dividend by 10 percent a year for the next three years. After that, it will maintain a constant dividend of $1.90 a share. Last year, the annual dividend was $2.70 a share. What is the market value of this stock if the required rate of return is 15 percent?

A

$13.39

Explanation
P3 = $1.90/.15 = $12.67
P0 = $2.70 × .90/1.15 + $2.70 × .902/1.152 + [$2.70 × .903 + $12.67]/1.153 = $13.39

29
Q

The Yarn Outlet has net income of $87,400 for the year with 6,500 shares of stock outstanding. Big Knitter is a similar firm with similar growth opportunities that has 8,400 shares of stock outstanding with a market price of $9.34 a share and earnings per share of $.86. What is the estimated value of the Yarn Outlet?

A

$949,205

Yarn Outlet value = $9.34/$.86 × $87,400 = $949,205

30
Q

New Tour’s last annual dividend was $2 a share. The company plans to lower the dividend by $.30 each year for the next three years. In Year 5, it will pay a final liquidating dividend of $17 a share. If the required return is 22 percent, what is the current per share value of this stock?

A

$9.23

P0 = $1.70/1.22 + $1.40/1.222 + $1.10/1.223 + $17/1.225
P0 = $9.23
31
Q

A securities market primarily consisting of dealers who buy and sell for their own inventories is generally referred to as a(n) __________ market.

A

over-the-counter

32
Q

The EV/EBITDA ratio has an advantage over the PE ratio in situations where comparisons are being made of firms that vary based on their

A

degree of leverage.

33
Q

Multiple classes of stock are primarily created to

A

allow certain shareholders to retain control of a firm.

34
Q

The free cash flow model, as compared to other models, tends to be most helpful when valuing a share of stock in a

A

non-dividend-paying firm that has external financing needs.

35
Q

Which one of the following transactions occurs in the primary market?

A

Delta, Inc., sold new Delta stock to David

36
Q

Kate, an individual investor, sold 500 shares of Hewn Furniture stock on Monday. Levy, another individual investor, purchased those shares, although he never met Kate. You know for certain that this trade occurred in which market?

A

Secondary market

37
Q

Hentges Co. pays a constant annual dividend of $2.50 per share and has 1,000 shares of common stock outstanding. The company

A

must declare each annual dividend before it becomes an actual liability.

38
Q

Theo owns 49,800 of the 120,000 outstanding shares of BBE, Inc. The share price is $28.64. Each share is granted one vote for each open seat on the board of directors. Currently, there are three open seats. Theo wants to be on the board and is assuming that no one, other than himself, will vote for him. How much additional money, if any, must he invest in BBE to guarantee his election if the firm uses a straight voting system?

A

$292,156.64

Total number of shares needed = .5 × 120,000 + 1 = 60,001 shares
Additional shares needed = 60,001 − 49,800 = 10,201 shares
Additional cost to purchase shares = 10,201 × $28.64 = $292,156.64

39
Q

Webster preferred stock pays an annual dividend of $6.20 a share. What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 14.25 percent?

A

$43.51

P0 = $6.20/.1425 = $43.51

40
Q

Last week, Railway Cabooses paid its annual dividend of $1.12 a share. The company has been reducing its dividends by 4 percent each year. What is one share of stock worth at a required return of 17 percent?

A

$5.12

P0 = {$1.12 × [1 + (−.04)]}/[.17 − (−.04)] = $5.12

41
Q

An investor wants to purchase shares in a firm that has no growth opportunities but pays an annual dividend of $1.35. The market rate of return on similar securities is 12 percent. What is the maximum price the investor should pay for this stock?

A

$11.25

$1.35/.12 = $11.25

42
Q

Cassandra Chemical Corp. just paid an annual dividend of $2.69 a share. What is one share of this stock worth to you if the dividends increase by 5 percent annually and you require a rate of return of 12 percent?

A

$40.35

P0 = [$2.69 × (1 + .05)]/(.12 − .05)
P0 = $40.35
43
Q

Honore’s earned net income $337,000 last year. It has an estimated 70,000 shares of stock outstanding, but they are not actively traded. Gila Corp., which is a similar firm with similar growth opportunities, has 185,000 shares of stock outstanding with a market price of $32.20 per share. Gila’s earnings per share last year was $1.60. What is the estimated value of Honore’s?

A

$6,782,125

Estimated value = $32.20/$1.60 × $337,000 = $6,782,125

44
Q

Midtown Enterprises paid its first annual dividend yesterday in the amount of $.26 a share. The company plans to double each annual dividend payment for the next three years. After that, it will pay a constant $2.40 per share dividend indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 14.5 percent?

A

$13.66

P3 = $2.40/.145 = $16.55
P0 = $.52/1.145 + $1.04/1.1452 + ($2.08 + 16.55)/1.1453
P0 = $13.66
45
Q

SK Enterprises has total assets of $421,800, outstanding debt of $129,000, cash of $18,700, sales of $387,400, costs of $241,900, and depreciation of $31,200. The firm has 11,300 shares of stock priced at $34.40 a share. What is the firm’s EV to EBITDA ratio?

A

3.43

EV/EBITDA = [11,300 × $34.40 + $129,000 − $18,700]/($387,400 − $241,900) = 3.43

46
Q

Janlea Co. had total net earnings of $158,600 this past year and paid out 60 percent of those earnings in dividends. There are 84,000 shares of stock outstanding at a current market price of $18.43 a share. If the dividend growth rate is 2.8 percent, what is the required rate of return?

A

8.95%

Dividend per share = .60 × $158,600/84,000 = $1.13286
R = $1.13286/$18.43 + .028 = .0895, or 8.95%

47
Q

Primary Colors has a debt-equity ratio of .56, a return on assets of 8.2 percent, and a dividend payout ratio of 45 percent. What is the firm’s rate of growth?

A

7.04%

g = (1 − .45) × .082 × (1 + .56) = .0704, or 7.04%

48
Q

Ashlin, Inc., has one million shares outstanding but has never paid a dividend. It is expected to generate net (free) cash flows of $0 at the end of Year 1, $300,000 at the end of Year 2, and $850,000 per year, forever, beginning at the end of Year 3. If investors expect a rate of return of 13%, what is the present value of Ashlin’s stock?

A

$5.36

PV of CF3 = 850,000/.13 = 6,538,462
PV of all shares = ($300,000 + $6,538,462)/1.132 = $5,355,518
PV per share = $5,355,518/1,000,000 shares = $5.36

49
Q

Shares of Masha stock are currently selling for $14.43. The last annual dividend paid was $1.61 a share, and dividends increase at a constant rate. If the market rate of return is 14 percent, what is the dividend growth rate?

A

2.56%

$14.43 = [$1.61 × (1 + g)]/(.14 − g)
g = .0256, or 2.56%
50
Q

Hanover, Inc., is an all-equity firm with 35,000 shares of stock outstanding. The firm expects sales of $750,000 next year. Sales are expected to grow by 10 percent the following year and then level off to a constant 4 percent growth rate. Net cash flow varies in direct proportion to sales and is currently equal to 17 percent of sales. The required return for this firm is 14 percent. What is the estimated current value of one share of stock?

A

$38.35

Net cash flowYear 1 = .17 × $750,000 = $127,500
Terminal valueYear 2 = $127,500 × 1.10 × 1.04/(.14 − .04) = $1,458,600
Current firm value = $127,500/1.14 + [$127,500 × 1.10 + $1,458,600]/1.142 = $1,342,105.26
Price per share = $1,342,105.26/35,000 = $38.35

51
Q

Orville stock’s last annual dividend was $1.10 a share. Dividends are expected to increase by 15 percent for the next two years and then increase at a constant 3 percent annually. The required return is 17.5 percent. What is the current value per share?

A

$9.62

P2 = $1.10 × 1.152 × 1.03/(.175 − .03) = $10.33
P0 = $1.10 × 1.15/1.175 + [$1.10 × 1.152 + $10.33]/1.1752 = $9.62
52
Q

Duncan Street Mills is an all-equity firm with 32,000 shares of stock outstanding. The firm expects sales of $520,000 next year. Sales are expected to grow by 8 percent for the following two years and then level off to a constant 3 percent growth rate. Net cash flow varies in direct proportion to sales and is currently equal to 16 percent of sales. The required return is 17 percent. What is the estimated current value of one share of stock?

A

$20.10

Net cash flowYear 1 = .16 × $520,000 = $83,200
Terminal valueYear3 = $83,200 × 1.082 × 1.03/(.17 − .03) = $713,970.10
Total firm value = $83,200/1.17 + $83,200 × 1.08/1.172 + [$83,200 × 1.082 + $713,970.10]/1.173 = $643,125.76
Price per share = $643,125.76/32,000 = $20.10

53
Q

In a stock market report, the open price represents the

A

first trade of the day.

54
Q

An agent who arranges security transactions among investors without maintaining an inventory of their own is called a

A

broker.

55
Q

What is the primary business of the NYSE?

A

Attract and process order flow

Managerial Finance (6 decks)

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