Chapter 08

Stock Valuation

Multiple Choice Questions

1. What is the model called that determines the present value of a stock based on its next
annual dividend, the dividend growth rate, and the applicable discount rate?
A. zero growth
B. dividend growth
C. capital pricing
D. earnings capitalization
E. discounted dividend
2. Which one of the following is computed by dividing next year's annual dividend by the
current stock price?
A. yield to maturity
B. total yield
C. dividend yield
D. capital gains yield
E. growth rate
3. Which one of following is the rate at which a stock's price is expected to appreciate?
A. current yield
B. total return
C. dividend yield
D. capital gains yield
E. coupon rate
4. Which one of the following types of stock is defined by the fact that it receives no
preferential treatment in respect to either dividends or bankruptcy proceedings?
A. dual class
B. cumulative
C. non-cumulative
D. preferred
E. common
5. What are the distributions to shareholders by a corporation called?
A. retained earnings
B. net income
C. dividends
D. capital payments
E. diluted profits

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 6. Which one of the following is a type of equity security that has a fixed dividend and a
priority status over other equity securities?
A. senior bond
B. debenture
C. warrant
D. common stock
E. preferred stock
7. Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some
new equity shares for sale to the general public. This sale will occur in which one of the
following markets?
A. private
B. auction
C. exchange floor
D. secondary
E. primary
8. The secondary market is best defined by which one of the following?
A. market in which subordinated shares are issued and resold
B. market conducted solely by brokers
C. market dominated by dealers
D. market where outstanding shares of stock are resold
E. market where warrants are offered and sold
9. An agent who maintains an inventory from which he or she buys and sells securities is
called a:
A. broker.
B. trader.
C. capitalist.
D. principal.
E. dealer.
10. National Trucking has paid an annual dividend of $1.00 per share on its common
stock for the past fifteen years and is expected to continue paying a dollar a share
long into the future. Given this, one share of the firm's stock is:
A. basically worthless as it offers no growth potential.
B. equal in value to the present value of $1 paid one year from today.
C. priced the same as a $1 perpetuity.
D. valued at an assumed growth rate of one percent.
E. worth $1 a share in the current market.
11. An increase in which of the following will increase the current value of a stock according to the
dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
A. I and II only
B. III and IV only
C. I, II, and III only

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D. I, II, and IV only
E. I, II, III, and IV
12. The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
13. Which one of the following is an underlying assumption of the dividend growth model?
A. A stock has the same value to every investor.
B. A stock's value is equal to the discounted present value of the future cash flows which
it generates.
C. A stock's value changes in direct relation to the required return.
D. Stocks that pay the same annual dividend have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.

14. Answer this question based on the dividend growth model. If you expect the market
rate of return to increase across the board on all equity securities, then you should
also expect:
A. an increase in all stock values.
B. all stock values to remain constant.
C. a decrease in all stock values.
D. dividend-paying stocks to maintain a constant price while non-dividend paying
stocks decrease in value.
E. dividend-paying stocks to increase in price while non-dividend paying stocks
decrease in value.
15. Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any
stock.
E. An increase in the required return will decrease the capital gains yield.

16. Which one of the following represents the capital gains yield as used in the dividend
growth model?
A. D1
B. D1/P0
C. P0
D. g
E. g/P0

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17. Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today,
the company announced that future dividends will be increasing by 2.6 percent annually.
If you require a 12 percent rate of return, how much are you willing to pay to purchase
one share of this stock today?
A. $12.23
B. $12.55
C. $12.67
D. $12.72
E. $12.88

18. Sessler Manufacturers made two announcements concerning its common stock today.
First, the company announced that the next annual dividend will be $1.75 a share.
Secondly, all dividends after that will decrease by 1.5 percent annually. What is the
maximum amount you should pay to purchase a share of this stock today if you require a
14 percent rate of return?
A. $11.29
B. $12.64
C. $13.27
D. $14.00
E. $14.21
19. Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to
increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of
this stock next year, how much should you expect to pay per share if the market rate of
return for this type of security is 11.50 percent at the time of your purchase?
A. $37.33
B. $38.16
C. $38.83
D. $40.38
E. $42.00

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20. The common stock of Textile Mills pays an annual dividend of $1.65 a share. The
company has promised to maintain a constant dividend even though economic times are
tough. How much are you willing to pay for one share of this stock if you want to earn a
12 percent annual return?
A. $13.75
B. $14.01
C. $14.56
D. $14.79
E. $15.23