Snider’s Hardwoods has a dividend payout ratio of 45 percent, a return on assets of 9.4 percent, and a debt-equity ratio of 0.38. What is the firm’s rate of growth?

A) 14.27% B) 12.56% C) 8.95% D) 10.40% E) 11.60% Answer: C

Explanation: Dividend per share = (0.60 × $158,600) / 84,000 = $1.13286

R = $1.13286 / $18.43 + 0.028 = 0.0895, or 8.95% Difficulty: 3 Hard

Section: 6.2 Estimates of Parameters in the Dividend Discount Model

Topic: Stock returns and yields Bloom’s: Level 4 Analyze AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

73) Snider’s Hardwoods has a dividend payout ratio of 45 percent, a return on assets of 9.4 percent, and a debt-equity ratio of 0.38. What is the firm’s rate of growth?

A) 6.78% B) 7.39% C) 7.13% D) 6.55% E) 4.10% Answer: C

Explanation: g = (1 − 0.45) × [0.094 × (1 + 0.38)] = 0.0713, or 7.13%

Difficulty: 3 Hard

Section: 6.2 Estimates of Parameters in the Dividend Discount Model

Topic: Internal and sustainable growth rates

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

74) Primary Colors has a debt-equity ratio of 0.56, a return on assets of 8.2 percent, and a dividend payout ratio of 45 percent. What is the firm’s rate of growth?

A) 6.04% B) 6.52% C) 8.13% D) 7.04% E) 7.26% Answer: D

Explanation: g = (1 − 0.45) × [0.082 × (1 + 0.56)] = 0.0704, or 7.04%

Difficulty: 3 Hard

Section: 6.2 Estimates of Parameters in the Dividend Discount Model

Topic: Internal and sustainable growth rates

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

75) Tall Tree Timber has annual net income of $213,640 and 72,000 shares of stock outstanding. Big Trees is a similar firm with similar growth opportunities that has 75,000 shares of stock outstanding with a market price of $31.80 a share and earnings per share of $1.48. What is the estimated value of Tall Tree Timber?

A) $3,603,208

B) $4,590,373

C) $5,009,046

D) $4,087,082

E) $3,874,298

Answer: B

Explanation: Tall Tree Timber value = ($31.80 / $1.48) × $213,640 = $4,590,373

Difficulty: 3 Hard

Section: 6.3 Comparables

Topic: Stock valuation using multiples

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

76) The Yarn Outlet has net income of $87,400 for the year with 6,500 shares of stock outstanding. Big Knitter is a similar firm with similar growth opportunities that has 8,400 shares of stock outstanding with a market price of $9.34 a share and earnings per share of $.86. What is the estimated value of the Yarn Outlet?

A) $1,016,279

B) $837,040

C) $1,142,105

D) $751,620

E) $949,205

Answer: E

Explanation: Yarn Outlet value = $9.34 / $.86 × $87,400 = $949,205

Difficulty: 3 Hard

Section: 6.3 Comparables