TEXAS TECH UNIVERSITY

Assignment Stock Questions and Problems

Part 2

Fall 2023 TTU Foundations of Finance (BA-3303-D02) Full Term

Author: Ayan Paul Instructor: Keith Trent

1. Mosser Corporation’s common stock paid $1.32 in dividends last year and is expected to
grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require
11 percent return?
last year dividend (1  growth rate)
Value Vcs  =
required rate of return  growth rate
$1.32 1.07
= (0.11  0.07
= $35.31

2. Dalton Inc., has an 11.5 percent return on equity and retains 55% of its earnings for
reinvestment purposes. It recently paid a dividend of $3.25 and the stock is currently
selling for $40.
a. What is the growth rate for Dalton?

Growth rate = return on equity × retention rate

= 0.115 × 0.55 = 0.0633 or 6.33%
b. What is the expected return for Dalton’s stock?

Dividend
Expected rate of return = Market Price + growth rate

$3.25(1  0.0633)
= + 0.0633 = 0.1496 or 14.96%
$40

c. If you require a 13 percent return, should you invest in the firm?

Because the stock has an expected rate of return of 14.96 percent, which is greater than
your 13 percent required rate of return, you should invest.
3. Bates, Inc. pays a dividend of $1 and currently selling for $32.50. If investors require a 12
percent return on their investment from buying Bates stock, what growth rate would bates
have to provide investors?

Last Year Dividend 1  Growth Rate 

Value (Vcs) =
 Required Rate  Growth Rate 
$1  growth rate
$32.50 =
0.12  growth rate
Solving for the growth rate, g:
$32.50(0.12 –g) = $(1 + g,)
$3.90 – $32.50g = $1 + $g
$2.90 = $33.50g
g = 0.0866 or 8.66%
 4. You intend to purchase Dorchester common stock at $50 per share, hold it for 1 year, and
the sell it after a dividend of $6 is paid. How much will the stock price have to appreciate
for you to satisfy your required rate of return of 15 percent?

Dividend in Year 1 Price in Year 1

Value (Vcs) = (1 + Required Rate) + (1 + Required Rate)

$6 P1
$50 = 
1  0.15 1  0.15
Rearranging and solving for P1:
$50 (1.15) = $6 + P1
P1 = $50 (1.15) – $6

P1 = $51.50

The stock would have to increase $1.50 ($51.50 – $50) or 3 percent ($1.50/$50) to
earn a 15 percent rate of return.

5. Herrea Motor, Inc. paid a $3.50 dividend last year. At a constant growth rate of 5 percent,
what is the value of the common stock if investors require a 20 percent rate of return?

last year dividend (1  growth rate)

Value (Vcs) =
required rate of return  growth rate

$3.50 1  0.05 
=
0.20  0.05

= $24.50
6. Which of the following changes will make the value of a stock go up, other things being held
constant?
A) The required return decreases.
B) The required return increases.
C) In general, investors become more risk averse.
D) The growth rate of dividends decreases.
The answer is A. The required return decreases. When the required rate of return
decreases, it means that investors are willing to pay more for the same stream of future
income. Therefore, the value of a stock will go up.

7. A small company struggling to reach profitability just announced a major new government
 contract that will validate its technology and generate revenue for the next several years.
The announcement of the contract will
A) cause the stock price to increase because rcs (the required return) is likely to increase.
B) cause the stock price to decrease because the government usually pays below market
price for the goods and services it purchases.
C) cause the stock price to increase because rcs (the required return) is likely to decrease
and g (the growth rate in future dividends) is likely to increase.
D) have no effect on the stock price because the company has not yet paid any dividends.

The correct answer is C. cause the stock price to increase because rcs (the required return) is likely
to decrease and g (the growth rate in future dividends) is likely to increase. The announcement of
the major new government contract is positive news for the company, and investors are likely to
react by buying the stock. This will cause the stock price to increase.

8. According to Porter’s Five Forces a market will usually be more difficult to enter if there is:
A. Patented or proprietary know-how
B. Low brand loyalty
C. Wide access to distribution channels
D. Common technology
According to Porter's Five Forces, a market will usually be more difficult to enter if there is:
A. Patented or proprietary know-how

9. The constant dividend growth model assumes:

A. a constant annual dividend
B. a constant dividend growth rate for no more than the first 10 years
C. that the discount rate must be greater than the dividend growth rate
D. none of the above

The correct answer is C. that the discount rate must be greater than the dividend growth
rate.

The constant dividend growth model (CGM) is a stock valuation model that assumes that a
company's dividends will grow at a constant rate in perpetuity.

10. What is the value of HM stock which currently has a dividend of $2 and is growing at 7%? The
investor’s required rate of return is 11%.
A. $46
B. $50
C. $52
 D. $53.50
Price = Dividend / (Required Rate of Return - Dividend Growth Rate)
Price = $2 * (1 + 0.07) / (0.11 - 0.07)
Price = $53.50
Therefore, the value of HM stock is $53.50. So the correct option is D

11. Consolidated Airlines has just paid an annual dividend of $3 per share. If the expected growth
rate for Con Ed is 10%, and your required rate of return is 16%, how much are you willing to pay
for this stock?
A. $55
B. $50
C. $46.50
D. none of the above

Dividend Growth Rate = 10%

Price = Dividend / (Required Rate of Return - Dividend Growth Rate)
Price = $3 * (1 + 0.10) / (0.16 - 0.10)
Price = $55
Therefore, the correct answer is A. $55.

12. To accurately compare the rate of return on one investment with another, they should be:
A. equal in size or dollar amount
B. measured over different time periods
C. measured over equal time periods
D. held for more than one year

The correct answer is C. measured over equal time periods.

To accurately compare the rate of return on one investment with another, they should be measured over
equal time periods. This is because the rate of return on an investment can vary depending on the time
period over which it is measured.

13. Reasons for stock repurchases include all of the following EXCEPT:
A. to acquire shares used in management stock option incentive programs, in which managers
can purchase shares of stock at pre-specified prices.
B. to use in stock-based acquisitions of other firms.
C. to decrease the value of the stock.
D. the firm has the cash and sees its own stock as one of its most attractive investment
alternatives.
The correct answer is C. to decrease the value of the stock. Stock repurchases are typically made to
increase the value of the stock, not decrease it. The other answer choices are all valid reasons for stock
repurchases.
 14. A firm’s stock is to pay a $3 annual dividend next year, the current stock price is $60, and the
expected growth rate in dividends is 8%. Using the dividend discount growth model, what is the
expected return?
A. 5.0%
B. 8.2%
C. 13.4%
D. 13.8%

Expected Return = (Dividend / Current Stock Price) + Dividend Growth Rate

Expected Return = ($3 / $60) + 8%
Expected Return = 13%
Therefore, the correct answer is C. 13.4%

15. The constant dividend growth model assumes:

A. a constant annual dividend
B. a constant dividend growth rate for no more than the first 10 years
C. that the discount rate must be greater than the dividend growth rate
D. none of the above

Correct answer is C. that the discount rate must be greater than the dividend growth rate.

This is because the constant dividend growth model is based on the assumption that the
value of a stock is equal to the sum of all of its future dividend payments, discounted back to
their present value. If the discount rate is less than the dividend growth rate, then the sum
of the future dividend payments will be infinite, and the stock will be overvalued.
Answers

2. a.

b.

c.

3.

4.

5.

6. A
7. C
8. A
9. C
10. D
11. A
12. C
13. C
14. C
15. C