WEEK 3 NO 2 LEARNING ACTIVITY ANSWERS

According to the constant dividend growth model, what is the required return on a stock (RE) if the growth rate (g) is zero? Multiple choice question. RE = D1 / P0 RE = D1 – P0 RE = D0 / P0 RE = D1 + P0

which one is correct please confirm? QUESTION 25 The constant growth valuation model approach to calculating the cost of equity assumes that ____.   a. earnings, dividends, and stock price will grow at a constant rate   b. the growth rate is greater than or equal to ke   c. earnings and dividends grow at a constant rate, but stock price growth is indeterminate   d. dividends are constant

Which of the following statements is true about the constant dividend growth model?   Group of answer choices 1. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to no change in the value of the stock   2. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock   3. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a increased value of the stock

The market consensus is that Analog Electronic Corporation has an ROE = 14%, a beta of 1.85, and plans to maintain indefinitely its traditional plowback ratio of 3/4. This year's earnings were $3.10 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 15%, and T-bills currently offer a 6% return. a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Leading Trailing P/E Ratio

Suppose stock A's return is related to the market return by: RetA=0.6*Market Return + 0.04* (Market Return)² What is the change in stock A given a change in the market return? Suppose stock B's return is related to the market return by: RetB=0.6*Market Return What is the difference in returns between A and B if the market return is 5%? What is the difference if the market return is -5%?

Suppose you observe the following situation: Probability of State 0.35 0.40 0.25 State of Economy Recession Normal Irrational exuberance Stock A Stock B Expected Return Rate of Return if State Occurs Stock B % Stock A a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) -0.11 0.10 0.45 -0.09 0.10 0.25 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium

If D0 is the dividend just paid, D1 is the next dividend, and g is the constant growth rate, then Dt, the dividend t periods in the future, is given by Blank______. Multiple choice question. Dt = D0 × (1 − g)t Dt = D1 × (1 − g)t Dt = D0 × (1 + g)t Dt = D1 × (1 + g)t

Could you please show me the solution.

Which of the following formulas is INCORRECT? O A. Div = EPS, X Dividend Payout Rate OB. TE= (Div/P)+g OC. PN(Eg) × Div N+1 O D. earnings growth rate= retention rate x return on new investment

Suppose you observe the following situation: Probability of Rate of Return if State Occurs State of Economy Recession Normal Irrational exuberance State 0.25 0.55 0.20 Stock A -0.14 0.07 0.42 Stock B -0.12 0.07 0.22 a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) Expected Return Stock A Stock B % % b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.55, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium %

If the interest rate is approximately equal to the growth rate of dividends, the price of a stock will be close to Select one: a. infinity O b. It is impossible to tell based on the information above O c. 100000 O d. 0

6. Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: Pˆ0P̂0  =  =  D1(rs – g)D1(rs – g)   Which of the following statements is true? Increasing dividends will always increase the stock price.   Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources.   Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.     Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return? 704.91%   656.87%   13.82%   992.14%…

Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 Question 2 % Return on T-Bills, Stocks and Market Index Pay- Rubber- Market made Index 10 -13 T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 up 28 14.7 0 -10 -20 Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Using the data generated in the previous question (Question 1); a) Plot the Security Market Line (SML) -10 7 45 30 1 15 29 43 b) Superimpose the CAPM's required return on the SML c) Indicate which investments will plot on, above and…

The formula for calculating the cost of equity capital using the dividend growth model approach is Blank______. (RE denotes the cost of equity, D1 is the next period’s projected dividend, g is the growth rate, and P0 is the current stock price.) Multiple choice question. RE = D1 /(P0 + g) RE = (D1 /P0) /g RE = D1 /P0 + g RE = D1 /P0 – g

multible choice, In applying the constant-growth dividend model, increasing the market capitalization rate will cause a stock’s intrinsic value to? why? decrease increase remain unchanged. decrease or increase, depending upon other factors.

The market's reaction to the announcement of a change in the firm's dividend payout is referred to as the:Question 25Answer A. information content effect. B. MM Proposition II. C. MM Proposition I. D. efficient markets hypothesis.

Compare and contrast constant growth model and zero growth model in stock valuation. Support your answer with examples.

QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…