a. Investors will only invest in a stock if it gives a higher return than they could get elsewhere. Therefore, if a stock is fairly priced, its expected return will be greater than the cost of equity capital. False True b. A stock that is expected to pay a level dividend in perpetuity has a value of P = DIV₁/r. Any company that can reinvest to grow its earnings will have a greater value. False True c. The dividend discount model is still logically correct even for stocks that do not currently pay a dividend.

a. Investors will only invest in a stock if it gives a higher return than they could get elsewhere. Therefore, if a stock is fairly priced, its expected return will be greater than the cost of equity capital. False True b. A stock that is expected to pay a level dividend in perpetuity has a value of P = DIV₁/r. Any company that can reinvest to grow its earnings will have a greater value. False True c. The dividend discount model is still logically correct even for stocks that do not currently pay a dividend.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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If Gamma Ltd. is a company that prohibits dividend payments entirely and forever, what will its stock be worth? Select one: a. Its stock price will be infinitely large. b. Its stock price will be lower than other similar companies. c. Its stock price must be calculated with the formula Benchmark P/E ratio x EPS. d. Its stock will be worth nothing. e. Its stock price must be calculated using the formula P = D/r.
[multiple choice questions] INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC? a. The market risk premium is decreasing. b. Flotation costs associated with issuing new common stock increase. c. The company's beta is increasing. d. Inflation is expected to increase. e. The flotation costs associated with issuing preferred stock increase.
Please help by telling me the correct awnser The value of an ordinary shareSelect one or more:a. Will fall if future profit forecasts are higher than expectedb. Is always at its fundamental valuec. Can rise and fall along with market sentimentd. Will rise if a firm introduces some cost saving innovation
АВС XYZ Discount rate (r) Historical growth rate of 0.015+2*0.085=0.185 0.015+1.5*0.085=0.142 (58/30)^(1/30)-1=0.022 Not available. Cannot dividends compute without dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the 467*(1+0.185)/(0.185-0.045) dividend growth model with =3953 the sustainable growth rate Fundamental value using residual income growth 0.15*(1-0.7)=0.045 467*(1+0.185)/(0.185-0.022) 0.2*(1-0)=0.2 Not available. Cannot =3395 compute without dividends Not available. Cannot compute without dividends 80*(1+0.022)-(550*0.022)/(0. 185-0.022)=427.36 Not available. Cannot compute without dividends model with the historical growth rate Fundamental value using the 80*(1+0.045)-(550*0.045)/(0. residual income growth 12*(1+0.2)-(100*0.2)/(0.142- 0.2)=96.5 185-0.045)=420.35 model with the sustainable growth rate
Particulars 1. Discount rate АВС XYZ 18.5% 14.25% Not 2. Historical growth rate 2.2218% available 3. Sustainable growth 4.5% 20% rate 4. Fundamental value of stock using dividend growth model through historical growth rate 5. Fundamental value of stock using dividend growth model through sustainable growth rate 6. Fundamental value of stock using residual income growth model through historical growth rate 7. Fundamental value of stock using residual income growth model through sustainable growth rate Not Tavailable 3395 Not available 3953 Not 427.30 available 420.35 1 96.5
2. I need help with multiple choice finance home work question Due to the ___________, the total rate of return on a stock can be positive even when the stock's price decreases. Real rate of return. Capital appreciation. Supernormal growth. Interest yield. Dividend yield.
5. Expected returns, dividends, and growth The constant growth valuation formula is as follows: Po D Is-g Which of the following statements is true? O 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. Increasing dividends will always increase the stock price. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.85 at the end of the year. Its dividend is expected to grow at a constant rate of 9.50% per year. If Walter's stock currently trades for $29.50 per share, then the expected rate of return on the stock is Walter's dividend is expected to grow at a constant growth rate of 9.50% per year. What do you expect to happen to Walter's expected dividend yield in the future? It will increase. It will stay the same. O It will decrease.
You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think a. the stock should be sold. b. the stock is a good buy. c. management is probably not trying to maximize the price per share. d. dividends are not likely to be declared. e. the stock is experiencing supernormal growth.
you MUST explain your answer. Also, explain why 1 or 2 of the other options are FALSE: >>> 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.
If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion? O 1. The stock offers a high dividend payout ratio. 02 The market is overvaluing the stock. O 3. The stock has a low level of risk. O 4. The market is undervaluing the stock
2. Explain why increasing financial leverage increases the risk tolerated by shareholders. 3. In your opinion, why do most businesses with financially attractive investment opportunities continue to sustain conservative capital structures? 4. On the other hand, why do you suppose several promising small businesses fail to follow the recommendation in item 3? 5. One determinant of a company's debt capacity is the liquidity of its assets. Name two common ratios that are exclusively intended to measure the liquidity of a company's assets relative to its liabilities. Give their specific use to the company's performance analyzation.
Which of the following statements is FALSE? Select one: O In recent years, an increasing number of firms have replaced dividend payouts with share repurchases. O The price of a share of stock is equal to the present value of the expected future dividends it will pay. O The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it. O The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders, O An investor might generate cash by choosing to sell the shares at some future date. O Fulture dividend payments and stock prices are not known with certainty: rather these values are based on the investor's expectations at the time the stock is purchased. O The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price. O In the dividend discount model, we implicitly assume that any cash paid out to the shareholders takes the…

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