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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3. Consider the following two statements: Statement 1: A firm can either pay its earnings to its investors, or it can keep them and reinvest them; Statement 2: According to the constant dividend growth model, the share price of the firm depends on the current dividend level, divided by the cost of equity capital plus the grow rate. Which one of the following combinations (true/false) relating to the above statement is correct? A. Statement 1 Statement 2 True True B. Statement 1 Statement 2 True False C. Statement 1 Statement 2 False False D. Statement 1 Statement 2 False True
“The constant-growth model should not be used with just any stock.” Explain with reasons the assumptions used by analysts when using the constant- growth dividend model.
Reverse engineering share prices is an exercise in deductive reasoning. If we assume market price reflects share value, then through reverse engineering we can infer what the market assumes about a. the expected rate of return on equity capital, holding expected profitability and long-run growth constant. b. the expected profitability, holding the expected rate of return on equity capital and long-run growth constant. c. the expected long-run growth, holding the expected rate of return on equity capital and expected profitability constant.
Is the following sentence true or false? Please explain. The cost of new equity (re) could possibly be lower than the cost of reinvested earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
Is this statement true or false? Give a reason for your answer. "A company can always increase its stock price by increasing its dividend payout ratio."
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
Indicate whether the following statements are true or false. If the statementis false, explain why.f. If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm’s investment opportunities improve.
choose the answer only
14. Which of the following statements is CORRECT? a. Other things held constant, the higher a firm's target dividend payout ratio, the higher its expected growth rate should be. b. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high dividend payout ratio. c. Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price. d. The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios. e. Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some…
Choose option a,b,c,d,e for the following: Question 4 - Your income is exempt from taxes. Considering this fact, which of the following is true? a. You will always prefer your firm to retain its earning and grow faster so that you can enjoy capital gains. b. You will always choose your stocks bases on whether they offer a high or a low dividend payout. c. You will always go for low dividend – high growth stocks. d. You will want to invest in tax free government bonds. e. You will be indifferent between receiving dividends or capital gains.
[S1] If an individual stock's beta is higher than 1, that stock is riskier than the market. [S2] In determining the estimated cost of equity, the CAPM explicitly recognizes a firm’s risk but it does not rely on any dividend assumptions or growth of dividends.a. both are trueb. both are falsec. S1 is trued. S2 is true
Answer this question based on the dividend growth model. If you expect the required rate of return to increase across the board on all equity securities, then you should also expect: A decrease in all stock values. All stock values to remain constant. An increase in all stock values. An increase or a decrease in all stock values. None of the above.

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