a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
e. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
ANSWER C
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. An increase in a firm's expected growth rate would cause its required rate of return to
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possibly increase, possibly decrease, or possibly remain constant.
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If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks
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the stock is a good buy.
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The preemptive right is important to shareholders because it
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protects the current shareholders against a dilution of their ownership interests.
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If markets are in equilibrium, which of the following conditions will exist?
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Each stock's expected return should equal its required return as seen by the marginal investor.
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Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
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Some class or classes of common stock are entitled to more votes per share than other classes.
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Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%
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These two stocks must have the same dividend yield.
10-7=3 12-9=3
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Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?
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If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.
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Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
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If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
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Which of the following statements is CORRECT, assuming stocks are in equilibrium?
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The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
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Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A B
Price $25 $40
Expected growth 7% 9%
Expected return 10% 12%
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A's expected dividend is $0.75 and B's expected dividend is $1.20.
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Which of the following statements is CORRECT?
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a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
b. Two firms with the same expected dividend and growth rate must also have the same stock price.
c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.
d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
ANSWER A
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If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
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The stock's price one year from now is expected to be 5% above the current price.
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Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
X Y
Price $30 $30
Expected growth (constant) 6% 4%
Required return 12% 10%
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One year from now, Stock X's price is expected to be higher than Stock Y's price.
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Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?
Expected dividend, D1 $3.00
Current Price, P0 $50
Expected constant growth rate 6.0%
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The stock's expected dividend yield and growth rate are equal.
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