University of Perpetual Help System laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
Investment Management
2nd Semester, A.Y. 2017 - 2018
Midterm Quiz 1
Name: ________________________________________ Date: ___________
Course Year & Section: _____________________ Score: __________
(Erasure/Alteration means wrong)
Show your solutions. 2 points each.
1. A stock you are interested in paid a dividend of P1 last week. The anticipated growth rate
in dividends and earnings is 20% for the next year and 10% the year after that before
settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the
expected price of the stock.
A. P17.20
B. P17.90
C. P18.20
D. P19.40
E. P19.75
2. If a company paid a dividend of P0.40 last month and it is expected to grow at 7% for the
next 6 years and then grow at 4% thereafter, the dividend expected in year 8 is ___.
A. P0.63
B. P0.65
C. P0.68
D. P0.69
E. P0.74
3. What would be the maximum an investor should pay for the common stock of a firm that
has no growth opportunities but pays a dividend of P1.36 per year? The next dividend
will be paid in exactly 1 year. The required rate of return is 12.5%.
A. P9.52
B. P10.88
C. P12.24
D. P17.00
E. None of the above
4. Which of the following amounts is closest to what should be paid for Overland common
stock? Overland has just paid a dividend of P2.25. These dividends are expected to grow
at a rate of 5% in the foreseeable future. The required rate of return is 11%.
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A. P20.45
B. P21.48
C. P37.50
D. P39.38
E. P47.70
5. The Double Dip Co. is expecting its ice cream sales to decline due to the increased
interest in healthy eating. Thus, the company has announced that it will be reducing its
annual dividend by 5% a year for the next two years. After that, it will maintain a
constant dividend of P1 a share. Two weeks ago, the company paid a dividend of P1.40
per share. What is this stock worth if you require a 9% rate of return?
A. P10.86
B. P11.11
C. P11.64
D. P12.98
E. P14.23
6. The Double Dip Co. is expecting its ice cream sales to decline due to the increased
interest in healthy eating. Thus, the company has announced that it will be reducing its
annual dividend by 5% a year for the next two years. After that, it will maintain a
constant dividend of P1 a share. Two weeks ago, the company paid a dividend of P1.40
per share. What is this stock worth if you require a 9% rate of return?
A. P10.86
B. P11.11
C. P11.64
D. P12.98
E. P14.23
7. Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy.
The firm pays a P2.00 a share dividend every other year. The last dividend was paid last
year. Five years from now, the company is repurchasing all of the outstanding shares at a
price of P50 a share. At an 8% rate of return, what is this stock worth today?
A. P34.03
B. P37.21
C. P43.78
D. P48.09
E. P53.18
8. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to
great success. The company paid its first annual dividend yesterday in the amount of P.28
a share. The company plans to double each annual dividend payment for the next three
years. After that time, it is planning on paying a constant P1.50 per share indefinitely.
What is one share of this stock worth today if the market rate of return on similar
securities is 11.5%?
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A. P9.41
B. P11.40
C. P11.46
D. P11.93
E. P12.43
9. Martin's Yachts has paid annual dividends of P1.40, P1.75, and P2.00 a share over the
past three years, respectively. The company now predicts that it will maintain a constant
dividend since its business has leveled off and sales are expected to remain relatively
constant. Given the lack of future growth, you will only buy this stock if you can earn at
least a 15% rate of return. What is the maximum amount you are willing to pay to buy
one share today?
A. P10.00
B. P13.33
C. P16.67
D. P8.88
E. P20.00
10. Martin's Yachts has paid annual dividends of P1.40, P1.75, and P2.00 a share over the
past three years, respectively. The company now predicts that it will maintain a constant
dividend since its business has leveled off and sales are expected to remain relatively
constant. Given the lack of future growth, you will only buy this stock if you can earn at
least a 15% rate of return. What is the maximum amount you are willing to pay to buy
one share today?
A. P10.00
B. P13.33
C. P16.67
D. P18.88
E. P20.00
11. The Lighthouse Co. is in a downsizing mode. The company paid a P2.50 annual dividend
last year. The company has announced plans to lower the dividend by P.50 a year. Once
the dividend amount becomes zero, the company will cease all dividends permanently.
The required rate of return is 16%. What is one share of this stock worth?
A. P3.76
B. P4.08
C. P4.87
D. P5.13
E. P5.39
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12. BC ‘n D just paid its annual dividend of P.60 a share. The projected dividends for the
next five years are P.30, P.50, P.75, P1.00, and P1.20, respectively. After that time, the
dividends will be held constant at P1.40. What is this stock worth today at a 6% discount
rate?
A. P20.48
B. P20.60
C. P21.02
D. P21.28
E. P21.43
13. Find the next dividend for a stock given that the stock price is P55.22 the growth rate in
dividends is 9.8% per year, and the required return is 18.8%.
A. P4.97
B. P5.84
C. P6.3
D. P6.8
14. If the intrinsic value of a stock is greater than its market value, which of the following is
a reasonable conclusion?
A. The stock has a low level of risk.
B. The stock offers a high dividend payout ratio.
C. The market is undervaluing the stock.
D. The market is overvaluing the stock.
15. Virgo Airlines will pay a P4 dividend next year on its common stock, which is currently
selling at P100 per share. What is the market's required return on this investment if the
dividend is expected to grow at 5% forever?
A. 4 percent.
B. 5 percent.
C. 7 percent.
D. 9 percent.
16. In the formula ke = (D1/P0) + g, what does g represent?
A. the expected price appreciation yield from a common stock.
B. the expected dividend yield from a common stock.
C. the dividend yield from a preferred stock.
D. the interest payment from a bond.
17. Find the current dividend for a stock given that the stock price is P38.52 the growth rate
in dividends is 4.2% per year, and the required return is 14.1%.
A. P1.36
B. P2.01
C. P2.89
D. P3.66
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18. Calculation of formula in common stock valuation does not include
A. intrinsic value
B. dividend of stockholder
C. number of stock issued
D. expected growth rate
19. The Black & Gold Co. is expected to pay a P2.50 annual dividend next year. The market
rate of return on this security is 12 percent and the market price is P31.40 a share. What is
the expected growth rate of Black & Gold?
A. 3.74 percent
B. 3.89 percent
C. 4.04 percent
D. 4.12 percent
20. The common stock of Andy’s Sporting Goods sells for P25.40 a share. The company
recently paid their annual dividend of P1.30 per share and expects to increase this
dividend by 3 percent annually. What is the rate of return on this stock?
A. 5.12 percent
B. 5.27 percent
C. 8.12 percent
D. 8.27 percent
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