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DBM5028 Business Finance / Chapter 7

TUTORIAL 7
EQUITY MARKETS AND STOCK VALUATION
1. What is the term describing the model that computes the present value of a stock
by dividing next year's annual dividend amount by the difference between the
discount rate and the rate of change in the annual dividend amount?
A.
B.
C.
D.

Stock pricing model.


Equity pricing model.
Dividend growth model.
Present value model.

2. Dividend yield can be defined as:


A. the current annual cash dividend divided by the current market price per share.
B. the current annual cash dividend divided by the current book value per share.
C. next year's expected cash dividend divided by the current market price per
share.
D. next year's expected cash dividend divided by the current book value per
share.
3. Which one of the following types of securities has no priority in a bankruptcy
proceeding?
A.
B.
C.
D.

Convertible bond.
Senior debt.
Common stock.
Preferred stock.

4. Dividend are best defined as:


A.
B.
C.
D.

Cash payments to shareholders.


Cash payments to either bondholders or shareholders.
Cash or stock payments to shareholders.
Distributions of stock to current shareholders.

5. McGheen Berhad common stock is selling for RM25 a share and has a dividend
yield of 4.5 percent. What is the dividend amount?
A.
B.
C.
D.

RM1.30
RM1.15
RM1.13
RM11.25

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DBM5028 Business Finance / Chapter 7

6. Farm Fresh Berhad pays a constant annual dividend of RM1.00 a share and
currently sells for RM18.00 a share. What is the rate of return?
A.
B.
C.
D.

5.56 percent
5.39 percent
4.65 percent
5.55 percent

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DBM5028 Business Finance / Chapter 7

7. Juhati Berhads stock is selling for RM25.40 per share based on a 10 percent rate
of return. What is the amount of the next annual dividend if the dividends are
increasing by 1.6 percent annually?
A.
B.
C.
D.

RM2.14
RM2.13
RM3.12
RM1.53

8. Which one of the following will increase the current value of a stock?
A.
B.
C.
D.

Decrease in the dividend growth rate


Increase in the required return
Increase in the capital gains yield
Decrease in the expected dividend for next year

9. Firmanshah expects to pay an annual dividend of RM2.20 per share next year.
What is the formula to calculate the dividend for year 5 if the firm increases its
dividend by 6 percent annually?
A.
B.
C.
D.

RM2.20 (1.06)1
RM2.20 (1.06)2
RM2.20 (1.06)3
RM2.20 (1.06)4

10. Which one of the following statements is CORRECT?


A. From a legal perspective, preferred stock is a form of corporate equity.
B. All classes of stock must have equal voting rights per share.
C. Common shareholders elect the corporate directors while the preferred
shareholders vote on mergers and acquisitions.
D. Dividends are tax-free income for individual investors.

11. Preferred dividends fulfill all criteria below, EXCEPT:


A.
B.
C.
D.

Must be paid before dividends can be paid to common stockholders.


It is a liability of the firm.
Can be deferred indefinitely.
Most preferred dividends are cumulative.

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DBM5028 Business Finance / Chapter 7

12. This morning Amir Fikri purchased a stock that will pay an annual dividend of
RM1.90 per share next year. He require a 12 percent rate of return and the annual
dividend will increase at 3.5 percent annually. What will be his capital gain be on
this stock if he sell it three years from now?
13. Huda Berhad has paid a constant annual dividend of RM2.40 a share for the past
15 years. Recently, the firm announced that the dividend will increase next year
by 10 percent and will stay at the level through year three, after which time the
dividends will increase by 2 percent annually. The required return on this stock is
12 percent. What is the current value per share?
14. Murniawan Sdn. Bhd. paid an annual dividend of RM1.60 per share last year. The
management just announced that future dividends will increase by 2.5 percent
annually. What is the amount of expected dividend in dividend year 3?
15. Samuel Berhad pays a constant annual dividend of RM1.25 per share. How much
are you willing to pay for one share if you require a 15 percent rate of return?
16. Turkish Mansion Sdn. Bhd. just paid its annual dividend of RM1.40. The required
return is 16 percent and dividend growth rate is 2 percent. How much is the value
of this stock today?
17. Rani DD Berhad is expected to pay its first annual dividend of RM0.80 per share
each year for three years from now. Starting in year six, the company is expected
to start increasing the dividend by 2 percent per year. What is the value of this
stock today at a required return of 12 percent?
18. The common stock of Jason Berhad is valued at RM10.80 a share. The company
increases its dividend by 8 percent annually and expects its next dividend to be
RM0.20 per share. What is the total rate of return on this stock?
19. Macaroon Delight just paid its annual dividend of RM1.45 a share. The firm
recently announced that all future dividends will be increased by 2.8 percent
annually. What is one share of this stock worth to you if you require a 14 percent
rate of return?
20. Currently, the common stock of Veron Grill is selling for RM22 a share and has a
6 percent rate of return. The growth rate of the dividends is 1 percent annually.
What is the amount of the next annual dividend?
21. Star Trade stock is currently selling for RM48.29 per share. The market requires a
13 percent return on the firm's stock. If the company maintains a constant 5.5
percent growth rate in dividends, what was the most recent annual dividend per
share paid on the stock?

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DBM5028 Business Finance / Chapter 7

22. BG Diamond Store is a jeweler firm. The company just paid a RM4 annual
dividend, but management expects to reduce the payout by 4 percent per year,
indefinitely. If you require a 12 percent return on this stock, how much will you
pay for a share today?
23. Suresh Hardware Store is expected to pay the following dividends over the next
four years: RM5, RM12, RM18, and RM1.80. Afterwards, the company pledges
to maintain a constant 4 percent growth rate in dividends, forever. If the required
return on the stock is 14 percent, what is the current share price?
24. The stock price of Warith Berhad is RM71. Investors require a 15 percent rate of
return on similar stocks. If the company plans to pay a dividend of RM4.20 next
year, what growth rate is expected to be for the company's stock price?

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