CLASS / COURSE: Stock Valuation
Which of the following statements about stock valuation is most correct?
1. All dividends, including the one just paid (i.e., D0), must be included in the calculation of today's stock price.
2. It is impossible to value a stock with a negative growth rate.
3. The price of a share of stock of a company that currently pays no dividend must be zero.
4. In the constant dividend growth model, the required rate of return is equal to the dividend yield minus the capital gain yield.
5. If a stock is expected to pay a constant dividend forever, then its price should never change, provided that the required rate of return stays the same.
The constant dividend growth model may be used to find the price of a stock in all of the following situations except:
1. when the expected dividend growth rate is less than the discount rate.
2. when the expected dividend growth rate is negative.
3. when the expected dividend growth rate is zero.
4. when the expected dividend growth rate is more than the expected return.
5. the constant growth model works in all known circumstances, it never fails.
If the quoted dividend yield in the paper was 2.4% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield?
1. the day open of $29.75.
2. the day low of $28.50.
3. the day close of $30.00.
4. the day high of $33.50.
5. None of the above.
Which of the following statements is most correct?
1. Assume that the required rate of return on a given stock is 13 percent. If the stock's dividend is growing at a constant rate of 5 percent, its expected dividend yield is 5 percent as well.
2. The dividend yield on a stock is equal to the expected return less the expected capital gain.
3. A stock's dividend yield can never exceed the expected growth rate.
4. All of the answers above are correct.
5. Answers b and c are correct.
If you use the constant dividend growth model to value a stock, which of the following is certain to cause you to increase your estimate of the current value of the stock?
1. Decreasing the required rate of return for the stock.
2. Decreasing the estimate of the amount of next year's dividend.
3. Decreasing the expected dividend growth rate.
4. An announcement that the CFO has been fired.
5. none of the above
An increase in a firm's expected growth rate would normally cause the firm's required rate of return to
4. Remain constant.
5. Possibly increase, possibly decrease, or possibly remain unchanged.
Question 7 (10 points)
The common stock of Darkover Inc. just paid an annual dividend of $1.00. The dividend is expected to grow at a constant rate forever. The required rate of return for this stock is 12 percent. If the current price of the stock is $15 what is the expected growth rate of the dividends?
In the dividend valuation model the selling price at the end of the holding period is
1. based on the future discount rate.
2. based on the anticipated dividend stream to the purchaser.
3. based on the short-run horizon of the seller.
4. All of the above.
5. None of the above.
The common stock of Polybius Inc. just paid an annual dividend of $ 1.12 . The dividend is expected to grow at a constant rate forever. The required rate of return for this stock is 13.3 percent. If the current price of the stock is $ 35.87 what is the expected growth rate of the dividends? Give your answer to the nearest .1%. Do not use the % sign in your answer. For example, if the answer is 9.2% enter your answer as 9.2 rather than .092 or 9.2%.
Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just paid dividends of $1. This growth rate is expected to continue. How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%.
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SUBJECTS / CATEGORIES:
2. Financial Management
3. Corporate Finance
4. Investment and Portfolio Management