Section1: Multiple choice questions (2 points each) M I. The common stock of Aut

Question

Section1: Multiple choice questions (2 points each) M I. The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year the annual dividend is distributed. The firm has established a patern 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 E. 20.86 percent M 2 Roy's Welding Supplics common stock sells for $38 a share and pays an annual dividend that inecreases by 3 percent annually The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid? A. S1.80 B. SI.86 C. $1.92 D. $1.98 E. $2.10 M 3. 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 E. market where warrants are offered and sold M 4. An agent who maintains an inventory from which he or she buys and sells securities is called a A. broker. B. trader C. capitalist. D. principal E. dealer. M 5. A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which typ market? A. auction B private C over-the-counter D. regional E. electronic network

Explanation / Answer

Since, multiple questions have been posted, I have answered the first two questions with complete details.

____

M.1

The market rate of return can be calculated with the use of following formula:

Market Rate of Return = Dividend Next Year/Common Stock Price + Growth Rate

Using the information provided in the question, we get,

Market Rate of Return = 1.35/28.16 + 3% = 7.79% (which is Option B)

_____

M.2

The amount of last dividend paid can be arrived with the use of following formula:

Market Rate of Return = Dividend Last Year*(1+Growth Rate)/Common Stock Price + Growth Rate

Substituting values in the above formula, we get,

8.20% = Dividend Last Year*(1+3%)/38 + 3%

Rearranging values, we get,

Dividend Last Year = ((8.20% - 3%)*38)/(1+3%) = $1.92 (which is Option C)

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