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. 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

3. Which one of the 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

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. cumulative
B. non-cumulative
C. preferred
D. common

5. What are the distributions to shareholders by a corporation called?

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. common stock
D. preferred stock
7. 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

8. 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
D. I, II, and IV only

9. High Country Builders currently pays an annual dividend of $1.35 and plans on
increasing that amount by 2.5 percent each year. Valley High Builders currently pays an
annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually.
Given this information, you know for certain that the stock of High Country Builders' has
a higher ______ than the stock of Valley High Builders.
A. market price
B. dividend yield
C. capital gains yield
D. The answer cannot be determined based on the information provided.

10. The dividend growth model:

11. 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.
12. 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. An increase in the required return will decrease the capital gains yield.

13. 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

14. 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

15. How much are you willing to pay for one share of Jumbo Trout stock if the company just
paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you
require a 10 percent rate of return?
A. $8.29
B. $8.33
C. $8.47
D. $8.53

16. 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
17. The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to
pay $1.35 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 3 percent annually and expects to
continue doing so. What is the market rate of return on this stock?
A. 7.42 percent
B. 7.79 percent
C. 19.67 percent
D. 20.14 percent

18. The current dividend yield on Clayton's Metals common stock is 2.5 percent. The
company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year.
The dividend growth rate is expected to remain constant at the current level. What is the
required rate of return on this stock?
A. 6.55 percent
B. 6.82 percent
C. 7.08 percent
D. 7.39 percent

19. Atlas Mines has adopted a policy of increasing the annual dividend on its common stock
at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of
$1.67. What will the dividend be six years from now?
A. $1.88
B. $1.92
C. $1.97
D. $2.02

20. Home Canning Products common stock sells for $44.96 a share and has a market rate of
return of 12.8 percent. The company just paid an annual dividend of $1.04 per share.
What is the dividend growth rate?
A. 8.29 percent
B. 8.45 percent
C. 9.23 percent
D. 10.25 percent

21. Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its
common stock next year. This year, the company paid a dividend of $2.75 a share. The
company adheres to a constant rate of growth dividend policy. What will one share of this
common stock be worth five years from now if the applicable discount rate is 11.7
percent?
A. $43.45
B. $43.87
C. $44.15
D. $45.19
22. The preferred stock of Rail Lines, Inc., pays an annual dividend of $7.50 and sells for
$59.70 a share. What is the rate of return on this security?
A. 10.38 percent
B. 11.63 percent
C. 12.56 percent
D. 12.72 percent

23. Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and
$1 a share over the next three years, respectively. After that, the company has stated that
the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you
per share if you demand a 10.8 percent rate of return on stocks of this type?
A. $6.67
B. $8.21
C. $10.14
D. $11.47

24. Dexter Metals, paid its first annual dividend yesterday in the amount of $0.18 a share.
The company plans to double each annual dividend payment for the next 3 years. After
that time, it plans to pay $1.25 a share for 2 years than then pay a constant dividend of
$1.60 per share indefinitely. What is one share of this stock worth today if the market rate
of return on similar securities is 10.24 percent?
A. $12.32
B. $12.77
C. $13.20
D. $14.26

25. Combined Communications is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 15 percent a year for the next 4 years and
then decreasing the growth rate to 3.5 percent per year. The company just paid its annual
dividend in the amount of $0.20 per share. What is the current value of one share of this
stock if the required rate of return is 15.5 percent?
A. $1.82
B. $2.04
C. $2.49
D. $2.71