BFN352 - 02 Problem set (1)

Which of the following assumptions would cause the constant growth stock valuation model to be invalid?  The constant growth model is given below: P0 = D0(1+g)/rs - g Select one: a. The growth rate is more than the required rate of return b. The growth rate is negative c. The growth rate is zero d. None of the assumptions would invalidate the model e. The growth rate is less than the required rate of return

1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the above

Assume you are using the dividend growth model to value stocks. If you expect the inflation rate to increase, you should also expect: O A. market value of all stocks to remain constant as the dividend growth will offset the increase in inflation. B. stocks that do not pay dividends to decrease in price while dividend paying stocks maintain a constant price. C. market value of all stocks to decrease, all else equal. ype here to search 10:12 10/18/2 PrtSen Home End

The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstances

The return earned for Asman stock is between time 1 and time 2 is ??? The between time 2 and time 3 is ??? The between time 3 and time 4 is ???   Your investment in Salinas stock yielded an annual rate of return between time 1 and time 2 ??? The between of time 2 and time 3 is ???   The between time 3 and time 4 is ???

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 %

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

Which of the following statements is CORRECT?   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. provide an explanation for the choice.

Is the following equation correct for finding the value of a constant growth stock? Explain.

Which of the following will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreases

The value of an asset is the present value of the expected returns from the asset during theholding period. An investment will provide a stream of returns during this period, and it isnecessary to discount this stream of returns at an appropriate rate to determine the asset’spresent value. A dividend valuation model such as the following is frequent. where:Pi = the current price of Common Stock iD1 = the expected dividend in Period 1ki = the required rate of return on Stock igi = the expected constant-growth rate of dividends for Stock iA. Identify the three factors that must be estimated for any valuation model, and explain whythese estimates are more difficult to derive for common stocks than for bonds.B. Explain the principal problem involved in using a dividend valuation model to value :(1) companies whose operations are closely correlated with economic cycles.(2) companies that are of very large and mature.(3) companies that are quite small and are growing rapidly.

Assume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock.  Your research shows the following:                           Beta                             =          βi                      =          1.54                         Risk free rate               =          Rf                    =          2.5% per year                         Market return              =          E(RM)              =          6.5% per year   Based on this information, answer the following:   A.  Based on the beta, how does the stock's risk compare to the market overall?  On what do you base your answer?   B.  Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall?  Why?   C.  According to the CAPM and the information given above, what is the expected return E(Ri) for this stock?   D.  If the required rate of return on this stock were 7% per year, would you invest?  Why or why not?

The constant growth DCF model used to evaluate the prices of common stocks isconceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities. True or False?

Suppose you observe the following situation:                     State of Economy Probability of State of Economy Rate of Return if State Occurs           Stock A Stock B     Bust 0.22 -0.12 -0.27     Normal 0.48 0.1 0.05     Boom 0.3 0.23 0.28                 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?

Which of the following is most likely a correct statement in regards to stock valuation models? The lower the expected dividends and higher the discount rate, the higher the value of the stock today, with all else being constant. The lower the required return on the stock, the lower the projected dividends for the stock, with all else being constant. The higher the expected growth rate of dividends, the higher the value of the stock. 0.000 I. II. III. I only II and III III only None of the above

Please show how to solve this Consider the REIT valuation spreadsheet presented in class. For each of the following scenarios, and all other things equal, determine whether each scenario will increase, decrease or won’t affect the probability that new investors will achieve their levered required rate of return. a. A distribution is defined for NOI growth rate, where the average value remains the same, but the right “tail” of the distribution is longer than the left “tail”. b. The quality adjustment value is lower.c. The risk premium is lower.d. The current market cap is higher.e. The price of the REIT is lower.f. The projected 10-year treasury rate is higher.

. Assume an investor uses the constant-growth DVM to value a stock. Listed are various situations that could affect the computed value of a stock. Look at each one of these individually and indicate whether it would cause the computed value of a stock to go up, go down, or stay the same. Briefly explain your answers. Dividend payout ratio goes up. Stock’s beta rises. Market return increases. Assume throughout that the current dividend (D0) remains the same and that all other variables in the model are unchanged.

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.30 0.05-0.15 Normal 0.55 0.15 0.15 Boom 0.15 0.20 0.35 Calculate the expected return for the two stocks.

Suppose you have predicted the following returns for stock C in three possible states of nature. What is the expected return of stock C?   State         Probability           Return   Boom            0.3                   0.15     Normal         0.5                   0.10    Recession      0.2                   0.02

Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?   a. The required return on a stock with beta = 1.0 will not change.     b. The required return on a stock with beta > 1.0 will increase.     c. The return on "the market" will increase.     d. The return on "the market" will remain constant.     e. The required return on a stock with a positive beta < 1.0 will decline.