Multiple choice questions using dividend discount model.
1. The XYZ Company, whose common stock is currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14 percent, what growth rate in dividends must be expected?
a. 5 percent
b. 14 percent
c. 9 percent
d. 6 percent
2. The common stock of Gold Corp. recently paid dividends of $1.96 per share. If the company is growing at a rate of 2% per year, and your required rate of return is 8%, what is Gold's stock worth to you?
a. 100.00
b. 33.32
c. 32.67
d. 20.00
3. Common stockholders are essentially
a. creditors of the firm.
b. managers of the firm.
c. owners of the firm.
d. All of the above.
4. Style Corp. preferred stock pays S3.15. What is the value of the stock if your required rate of return is 8.5% (round your answer to the nearest $1, and assume no transaction costs)?
a. $33
b. $23
c. $27
d. $37
5. You are considering the purchase of a share of AFZ Corporation common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. AFZ just paid a dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to pay for it now?
a. $28.57
b. $33.05
c. $20.83
d. $30.80
6. Moo Moo Land Dairy Co. has net income of $450,000 this year. The book value of MML common stock is $3 million dollars. The company's dividend payout ratio is 60% and is expected to remain this way. What is Moo Moo Land Dairy's sustainable growth rate?
a. 3%
b. 9%
c. 6%
d. 10%