If Gamma Ltd
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If Gamma Ltd. is a company that prohibits dividend payments entirely and forever, what will its stock be worth?
Select one:
a. Its stock price will be infinitely large.
b. Its stock price will be lower than other similar companies.
c. Its stock price must be calculated with the formula Benchmark P/E ratio x EPS.
d. Its stock will be worth nothing.
e. Its stock price must be calculated using the formula P = D/r.
The right of a shareholder to share proportionally in any new stock issue is called a/an ____________ right.
Select one:
a. coattail
b. preemptive
c. indenture
d. secured
e. charter
Which of the following statements about preferred shares is inaccurate?
Select one:
a. Preferred shares carry credit ratings.
b. In the event of liquidation of a firm's assets, preferred shareholders are paid out before common shareholders.
c. Preferred share dividends are always cumulative.
d. Preferred shares are often callable and puttable.
e. Preferred share dividend income from another Canadian corporation is tax-exempt.
Cumulative voting allows for meaningful participation by
Select one:
a. minority shareholders.
b. preferred shareholders.
c. institutional shareholders.
d. bondholders.
e. all stakeholders.
Alpha Enterprises has just paid a dividend of $3 per share. The company then immediately announced that, due to expected cash flow issues from a large project, no dividends will be paid for the next three years. Dividends of $4, $5, and $6 per share will then be paid in each of the three years after that. Following these non-constant dividends, the company expects earnings and dividends to grow at 6% for the foreseeable future. The required return is 13% on the company's stock. What should we pay for one share of Alpha's stock today?
Select one:
a. $44.71
b. $45.51
c. $46.71
d. $51.69
e. $55.89
Upsilon Utilities Inc. expects a constant growth rate of 2% in its dividend payments. If the company expects to pay a dividend of $3 per share in one year's time, and its current share price is $35, what is the required rate of return on its shares?
Select one:
a. 8.33%
b. 10.33%
c. 10.50%
d. 10.57%
e. 14.00%
Lambda Banking Group issued preferred shares eight years ago with a stated value of $95 and a dividend yield of 9%. What is the current price of each preferred share if the required return today is 12%?
Select one:
a. $8.55
b. $45.00
c. $65.50
d. $71.25
e. $95.00
Omicron Company has just paid a dividend of $2 per share. Analysts of the company's shares estimate a supernormal growth rate of 30% for the company for the next two years. Afterwards, the company is expected grow at a rate of 15% for another three years, before settling down to a stable growth rate of 7.5% forever. What is Omicron's share price in two years' time (after the second year of supernormal growth), assuming a required return of 12%?
Select one:
a. $94.63
b. $98.10
c. $101.96
d. $114.23
e. $128.88
Rho Corporation is electing three directors to its board using cumulative voting, and there are 1,000,000 shares outstanding. If you were a shareholder who wants to be elected to the board, how many Rho Corporation shares must you own to guarantee yourself a directorship seat on the board?
Select one:
a. 100,001
b. 250,000
c. 250,001
d. 333,334
e. 333,335
Sigma Inc. has just paid a dividend of $2.50 per share, and it is expected to pay a dividend of $2.75 per share in one year's time. Assuming that required return on a similar company's equity is 15% and the dividend growth will continue at the same rate forever, what is the dividend yield and capital gains yield on Sigma's shares?
Select one:
a. 5% and 10%
b. 5% and 8%
c. 8% and 5%
d. 10% and 5%
e. 10% and 8%
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1) a. Its stock price will be infinitely large.
2) b. preemptive
3) c. Preferred share dividends are always cumulative.
4) a. minority shareholders.
5) d. $51.69
6) d. 10.57%
7) d. $71.25
8) b. $98.10
9) c. 250,001
10) a. 5% and 10%
Step-by-step explanation
1) If excess earnings are not distributed, then the earnings may be retained for future expansions. Therefore, this may result to a higher share price in the future. This strategy is good for investors who do not think that dividends do not affect stock prices
2) No solution needed
3) preferred dividends may be cumulative, but not always
4) Cumulative voting helps minority shareholders to be represented in the board of directors
5) First, we compute the dividend in year 7:
D7 = D6 * 1.06
D7 = 6 * 1.06
D7 = 6.36
Now, we compute the present value of the dividends from year 7 onwards as of year 6:
PV = D7 / (r - g)
PV = 6.36 / (.13 - .06)
PV = 6.36 / .07
PV = 90.86
Now, we compute the price:
Price = (D4 * 1.13-4) + (D5 * 1.13-5) + (D6 * 1.13-6) + (PV * 1.13-6)
Price = (4 * 0.613319) + (5 * 0.54276) + (6 * 0.480319) + (90.86 * 0.480319)
Price = 2.45 + 2.71 + 2.88 + 43.64
Price = 51.69
6)
Price = D1 / (r - g)
35 = 3 / (r - .02)
35(r - .02) = 3
r - .02 = 3/35
r - .02 = .0857
r = .0857 + .02
r = 10.57%
7) First, we compute the annual dividend using the dividend yield:
Yield = Annual Dividend / Price
.09 = AD / 95
AD = .09 * 95
AD = 8.55
Now, we compute the current price:
Price = Dividend / Required Return
Price = 8.55 / .12
Price = 71.25
8) We first compute the dividends for years 1 to 6:
D1 = 2 * 1.30 = 2.60
D2 = 2.60 * 1.30 = 3.38
D3 = 3.38 * 1.15 = 3.89
D4 = 3.89 * 1.15 = 4.47
D5 = 4.47 * 1.15 = 5.14
D6 = 5.14 * 1.075 = 5.53
Now, we compute the present value of the dividends from year 6 onwards as of year 5:
PV = D6 / (r - g)
PV = 5.53 / (.12 - .075)
PV = 5.53 / .045
PV = 122.80
Now, we compute the price. The price required is after two years, which means if the current year is after two dividend payments, which means that the dividend next year is the computed dividend in year 3, and so on:
Price = (D3 * 1.12-1) + (D4 * 1.12-2) + (D5 * 1.12-3) + (PV * 1.12-3)
Price = (3.89 * 0.892857) + (4.47 * 0.797194) + (5.14 * 0.71178) + (122.80 * 0.71178)
Price = 3.47 + 3.56 + 3.66 + 87.41
Price = 98.10
9)
r = ((Number of Shares * Number of Directors wanted on BOD) / (Number of Required Directors + 1)) + 1
r = ((1000000 * 1) / (3 + 1)) + 1
r = (1000000 / 4) + 1
r = 250000 + 1
r = 250,001
10) First, we compute the growth rate:
g = (D1 - D0) / D0
g = (2.75 - 2.50) / 2.50
g = .25 / 2.50
g = 10%
Now, we compute the price:
Price = D1 / (r - g)
Price = 2.75 / (.15 - .10)
Price = 2.75 / .05
Price = 55
To compute the dividend yield:
Dividend Yield = D1 / Price
Dividend Yield = 2.75 / 55
Dividend Yield = 5.00%
To compute the capital gains yield, we again compute the price using the amount of dividend in year 2:
Price = (D1 * 1.10) / (r - g)
Price = (2.75 * 1.10) / (.15 - .10)
Price = 3.025 / .05
Price = 60.50
To compute the capital gains yield:
Capital Gains Yield = (P1 - P0) / P0
Capital Gains Yield = (60.50 - 55) / 55
Capital Gains Yield = 5.50 / 55
Capital Gains Yield = 10%
