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Chester Financial Corp had a return on equity of 18%.

Chester Financial Corp had a return on equity of 18%.

1. Chester Financial Corp had a return on equity of 18%. The corporation’s earnings per share was

$4.00, its dividend payout ratio was 30% and its profit-retention rate was 70%. If these relationships

continue, what will be the Chester Financial Corp’s internal growth rate?

a. 5.4%

b. 12.6%

c. 70.0%

d. 28.0%

2. CCT, Inc. expects its current annual $3 per share common stock dividend to remain the same for the

foreseeable future. Therefore, the value of the stock to an investor with a required return of 15% is

________.

a. $ 4.50

b. $ 3.53

c. $20.00

d. $45.00

3. 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

4. Which of the following statements concerning the required rate of return on stocks is true?

a. The higher an investor’s required rate of return, the higher the value of the stock.

b. If risk is reduced, the required return will decrease because more investors are risk-averse.

c. The required return on preferred stock is generally higher than the required return on

common stock.

d. The higher the risk, the higher the required return, other things being equal.

5. Butler Corp paid a dividend today of $3.50 per share. The dividend is expected to grow at a constant

rate of 8% per year. If Butler Corp stock is selling for $75.60 per share, the stockholders’ expected

rate of return is ________.

a. 12.63%

b. 12.53%

c. 13.00%

d. 14.38%

This document is a copyright document. It is solely for the use of course roster

students in this particular course. It is NOT for distribution outside the course

environment in any manner, for any reason, to any individual or group; past,

present, or future. Redistribution or further posting in any form is considered a

violation of the UAS Code of Conduct.

BA 325 – F13 – Quiz – Chapter 8

Page 2 of 4

6. What is the value of a preferred stock that pays a $3.50 dividend to an investor with a required rate of

return of 9% (round your answer to the nearest $1)?

a. $39

b. $23

c. $17

d. $31.50

7. How is preferred stock affected by a decrease in the required rate of return?

a. the value of a share of preferred stock increases

b. the dividend increases

c. the dividend decreases

d. the dividend yield increases

8. An example of the growth factor in common stock is ________.

a. acquiring a loan to fund an investment in Asia

b. retaining profits in order to reinvest into the firm

c. issuing new stock to provide capital for future growth

d. two strong companies merging together to increase their economy of scale

9. Linen Supply Co. paid a dividend of $3.25 on its common stock yesterday. The company’s dividends

are expected to grow at a constant rate of 5.5% indefinitely. If the required rate of return on this stock

is 17.5%, compute the current value per share of Linen Supply Co. stock.

a. $9.14

b. $27.08

c. $28.57

d. $31.82

10. Linen Supply Co.paid a dividend of $3.25 on its common stock yesterday. The company’s dividends

are expected to grow at a constant rate of 5.5% indefinitely. The required rate of return on this stock

is 17.5%. You observe a market price of $27.50 for the stock. Should you purchase this stock?

a. Yes, the market price is below the intrinsic value of the stock

b. No, the market price is above the intrinsic value of the stock

c. No, the growth rate in dividends is too far below the required return

d. Yes, but only if you can keep the stock for at least 5 years

11. Wallace Industries paid a dividend of $1.85 on its common stock yesterday. The dividends of Wallace

Industries are expected to grow at 8% per year indefinitely. If the risk free rate is 4% and investors’

risk premium on this stock is 9%, estimate the value of Wallace Industries stock 2 years from now.

a. $199.80

b. $46.61

c. $41.81

d. $38.11

This document is a copyright document. It is solely for the use of course roster

students in this particular course. It is NOT for distribution outside the course

environment in any manner, for any reason, to any individual or group; past,

present, or future. Redistribution or further posting in any form is considered a

violation of the UAS Code of Conduct.

BA 325 – F13 – Quiz – Chapter 8

Page 3 of 4

12. How is preferred stock similar to bonds?

a. Dividend payments to preferred shareholders (much like bond interest payments to

bondholders) are tax deductible.

b. Investors can sue the firm if preferred dividend payments are not paid (much like

bondholders can sue for non-payment of interest payments).

c. Preferred stockholders receive a dividend payment (much like interest payments to

bondholders) that is usually fixed.

d. Preferred stock is not like bonds in any way.

13. How is preferred stock similar to common stock?

a. Preferred dividend payments usually have unlimited growth potential.

b. Investors cannot sue a corporation for the non-payment of dividends.

c. Both preferred and common stockholders have voting control of a firm.

d. Preferred stock dividends and common stock dividends are fixed.

14. Assume that a firm had such serious financial problems that it was about to be liquidated after a

bankruptcy. All of the firm’s assets are about to be sold in order to pay the following claims against

the firm: bondholders, preferred stockholders, common stockholders, and federal income taxes. Of

the claims mentioned, what priority would common stockholders have?

a. first

b. second

c. third

d. fourth

15. Who bears the greatest risk of loss of value if a firm should fail?

a. bondholders

b. preferred stockholders

c. common stockholders

d. all of the above

16. Modem Development, Inc. paid a dividend of $5.00 per share on its common stock yesterday.

Dividends are expected to grow at a constant rate of 4% for the next two years, at which point the

stock is expected to sell for $56.00. If investors require a rate of return on Modem’s common stock of

18%, what should the stock sell for today?

a. $50.22

b. $48.51

c. $44.76

d. $40.22

This document is a copyright document. It is solely for the use of course roster

students in this particular course. It is NOT for distribution outside the course

environment in any manner, for any reason, to any individual or group; past,

present, or future. Redistribution or further posting in any form is considered a

violation of the UAS Code of Conduct.

BA 325 – F13 – Quiz – Chapter 8

Page 4 of 4

17. Creamy Custard common stock is currently selling for $75.00. It just paid a dividend of $3.65 and

dividends are expected to grow at a rate of 6% indefinitely. What is the required rate of return on

Creamy Custard’s stock?

a. 10.87%

b. 11.16%

c. 12.21%

d. 13.26%

18. You observe Golden Flashes Common Stock selling for $40.00 per share. The next dividend is

expected to be $4.00, and is expected to grow at a 5% annual rate forever. If your required rate of

return is 12%, should you purchase the stock?

a. yes, because the present value of the expected future cash flows is greater than $40

b. no, because the present value of the expected future cash flows is less than $40

c. yes, because the present value of the expected future cash flows is less than $40

d. no, because the present value of the expected future cash flows is greater than $40

19. Using the free cash flow method of valuation, an analyst determines the value of Company A’s stock

to be $10 and the value of Company B’s stock to be $14. Based on this information, which of the

following statements is most accurate?

a. Using the dividend valuation model, the value of company A’s stock will be lower than the

value of Company B’s stock.

b. Other things being equal, if Company A and Company B have the same firm value, Company

B must have more debt, thus leveraging its returns for the benefit of shareholders.

c. Other things being equal, if Company A and Company B have the same firm value, Company

A may have more shares of stock outstanding than Company B.

d. Company B’s required rate of return is higher than Company A’s required return.

20. Greenland Airlines has net income of $1 million this year. The book value of Greenland Airlines

common equity is $5 million dollars. The company’s dividend payout ratio is 70% and is expected to

remain this way. What is Greenland Airlines’ internal growth rate?

a. 6 %

b. 9%

c. 14%

d. 15%


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