Chapter7 - Next year's dividend at Doc Inc. will be $4 per...

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Unformatted text preview: Next year's dividend at Doc Inc. will be $4 per share, and its required return on equity investments is 14%. Doc Inc. pledges to increase its dividends by 4% per year, indefinitely. What would you pay for a share of Doc Inc. stock today? A. $ 40. B. $100. C. $110. D. $115. E. $120. A. $40 See Chapter 7, variation of prob. 4 Po = D/(R-g) = 4/(.14-.04) = $40 Please go to the next question. The stock for Happy Inc. currently sells for $50 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. It is the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? A. $2.19. B. $2.83. C. $3.00. D. $6.00. B. $2.83 See Chapter 7 Variation of Problem 6 at the end of the chapter. Dividend yield is 1/2 of 12% = 6%, so 6% of $50 = $3.00, This year's dividend times (1 +g) = next year's dividend = $3.00/1.06 = $2.83 Please go to the next question. A ______ is an agent who buys and sells securities from inventory. A. Broker. B. Dealer. C. Member. D. Valuation Specialist. B. Dealer See Chapter 7, page 209 Go to the next question ______ is equity without priority for dividends or in bankruptcy. A. Common Stock. B. Order Flow. C. Preferred Stock. D. SuperDOT. A. Common Stock. A. See Chapter 7, page 204 Bashful Inc has an issue of preferred stock outstanding that pays a $3 dividend every year, in perpetuity. If this issue currently sells for $40.43 per share, what is the required return? A. 3.00%. B. 4.70%. C. 7.42%. D. Cannot be determined. C. 7.42% See Chapter 7, page 197 Po = D/R, so R = D/Po = R $3.00/$40.43 = 7.42% This is a variation of problem #8 at the end of the chapter. For most companies the capital gains yield is larger than the dividend yield. A. True. B. False. A. True. See Critical Thinking and Concept Review question # 6 on page 217, page 202 ...
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