“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.
Q: If the fair value of a stock is more than its market value, which of the following is a reasonable…
A: Fair value of a stock is also known as its intrinsic value.Intrinsic value of a stock is the present…
Q: Illustrate the impact of changes in the dividend, the growth rate, the expected return on the…
A: The value of a stock is determined by several factors, including the dividend, the growth rate, the…
Q: Suppose we observe from market data that, for a given non-dividend paying stock, See Image What…
A: Forward price (F0) is the price of forward contract at which buyer and seller of the contract agreed…
Q: The cost of equity capital for non-dividend paying stocks can be determined by ____. I. using the…
A: CAPM = Risk free Rate + Beta * Market Risk Premium As per Dividend Discount Model,Ke = (D1/P0) +…
Q: Which of the following statements is false about the dividend irrelevance proposition of Modigliani…
A: According to Modigliani and Miller, if dividend policy and investment decisions are unrelated, then…
Q: Briefly summarise the findings of Penman and Sougiannis (1998) concerning the ex-post performance of…
A: Since there are multiple questions, first 2 questions are only answered. For unanswered questions,…
Q: Which of the following statements about event studies is/are true? (a) Event time is measured…
A: Several statements have been provided. We have to find the ones that are correct.
Q: Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not…
A: Three main actors of production namely land, labor and capital are given primary importance. Capital…
Q: How would you use the dividend yield model to value the price of a stock if it presently does not…
A: Answer: Dividend discount model is used to valuate a stock that is expected to pay future dividends.…
Q: A stock has a negative beta and does not pay dividends. Given this information, a model that is…
A: CAPM model can be used to understand the manner expected return related to undiversifiable risk.…
Q: wo potential explanations for the observed stock price reaction around equity carveout…
A: Equity carve out is a type of business reorganization. In this type of business reorganization, a…
Q: Which of the following statement is most correct? The cost of capital for internal common stocks is…
A: “Since you have asked multiple question, we will solve the first question for you. If you want any…
Q: Briefly discuss the limitations of Constant Growth Model in the valuation of stocks.
A: The constant growth model, often known as the Gordon Growth Model, is a method of stock valuation.…
Q: Why might the stock price changing make sense within the context of risk and return?
A: Stock price movement is dependent on various factors which would eventually impact the required rate…
Q: . In general, what are some characteristics of stocksfor which a dividend growth model is…
A: Answer: Companies making dividend payments and expecting dividend growth at predictable rates must…
Q: analyst is trying to determine the intrinsic value of a certain share. Which of the following is…
A: To find out the intrinsic value o the stock there two methods one is dividend discount model and…
Q: What does the capital asset pricing model (CAPM) calculate? a. The expected rate of return on…
A: Capital Asset Pricing Model (CAPM) is a financial model used to determine expected return on an…
Q: Discuss whether the dividend growth model or the capital asset pricing model should be used to…
A: The dividend growth model and the capital asset pricing model are both methods that can be used to…
Q: “When the stock market declines the net worth of companies decreases, causing the problem of…
A: Asymmetric information exists in every transaction when one party possesses knowledge that the other…
Q: 1. How do you think today's low interest rate environment is impacting the time value of money? How…
A: The answers are given below
Q: Assuming that the required rate of return is determined by the CAPM, explain how you would usethe…
A: Given: The required rate of return is determined by the CAPM and the dividend growth model to…
Q: In the Discounted Cash Flow Model (aka. Dividend Valuation Model) for cost of equity, if an asset…
A: In dividnd discount model , cost of equity is present value of all dividend income and change in…
Q: Why is the valuation method of valuing dividends (based on the present value of dividends) a more…
A: There are different methods of valuing a stock. One way is to determine the present value of all…
Q: When all investors have the same information and care only about expected return and volatility; if…
A: The measure of the dispersion of return on stocks is known as volatility. High volatility means the…
Q: Offer some reasons that the intrinsic value that you might calculate with the methodologies learned…
A: Intrinsic value of a stock can be calculated using different methods like DCF (discounted cash…
Q: You, in analyzing a stock, find that its expected return exceeds its required return. This suggests…
A: The objective of the question is to understand the implications of a situation where the expected…
Q: Which of the following statements is most correct? Other things equal, the higher the dividend…
A: Each of these statements reflects different financial concepts that can influence stock values, but…
Q: What are three main issues that must be dealt with when evaluating stocks with the dividend growth…
A: Three main issues that must be dealt with while evaluating the stock with dividend growth model is…
Q: The Dividend-Discount Model (DDM) can only be used to value stocks that are currently paying…
A: Answer: The answer is TRUE.
Q: Describe, in words, how to use the variable growth rate technique to value a stock
A: The variable growth rate is the rate of growth which is not constant and various companies who are…
Q: If you want to value a firm that consistently pays out its earnings as dividends, the simplest model…
A: Valuing companies: There are several methods that are used to value a company. Four of the most…
Q: Describe and compare (i) the Simple Earnings Capitalisation Model, (ii) Burgstahler & Dichev's…
A: (i) Simple earnings capitalization model: Simple earnings capitalization model determines the value…
Q: Which of the following statements is most likely FALSE? A. We should use the general dividend…
A: The dividend discount model values a company by discounting the future dividends. The present value…
Q: The dividend growth model of stock evaluation relies on several assumptions that might not be true…
A: Dividend growth model is defined as valuing the stock price of the company based on certain theories…
Q: What does the term "intrinsic value" mean? Discuss. 2. Once an investor calculates intrinsic value…
A: 1. The intrinsic value of a stock is its true value. It refers to what a stock (or any asset, for…
Q: "The dividend discount model is used to find the price of a stock based on the expected dividends…
A: The Dividend Discount model is used to calculate the Price of share considering time value of money.…
Q: How will the change in required return influence the price of a stock? How will the dividend growth…
A: The Gordon growth model calculates the price of the stock by using the dividends, growth rate of…
“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.
Step by step
Solved in 3 steps
- The dividend growth model of stock evaluation relies on several assumptions that might not be true in the real world. What are they?When is it appropriate to use the dividend valuation models, such as the Zero Growth Model, constant growth model and variable growth model, in estimating the price of a stock?Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?
- One of the following decisions is not taken to increase the stock price: Select one: a. Maximize costs b. Attracting additional funds c. Maximize net income or profit d. Returning profits to owners over timeApart from using PE ratio, what is another way of valuing the stock price? if we have the EPS, Share Price, Dividend Per Share, ROE and the discount rate (R). And what are the assumptions and the limitations of this model? What can be said about the dividend growth model? Similarly what can be said about the capital asset pricing model?Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset Selection
- Suppose we observe from market data that, for a given non-dividend paying stock, See ImageWhat might explain the inequality in this relationship, is markets are efficient or does result in arbitrage opportunities?Suppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soe"T) if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where Fo + Soe™" does not result in arbitrage opportunities1. The P/E method of valuation is appropriate for Value investors. What does it mean if the P/E ratio is higher than the industry average? Should you buy the stock or not? 2. Why is EPS an inferior measure compared to cash flow? In what way is it a superior measure for stock investing compared to cash flow analysis?
- 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 96.5Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories? Select one: a. the clientele effect b. the expectations theory c. the residual dividend theory d. the information effect Question 19 In perfect capital markets there Select one: a. are no income taxes. b. are no flotation costs. c. All of these.What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?