The constant growth model sometimes yields negative values for stocks, when growth rates exceed the discount rate.TrueFalse

The constant growth model, also known as the Gordon Growth Model, assumes that a stock's value is…

Answered: The constant growth model sometimes…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Similar questions

Typically, short-term interest rates: А. are more volatile than long-term interest rates В. are less volatile than long-term interest rates C. have similar volatility as the long-term interest rates D. None of the above
The dividend growth model is only useful for estimating a stock's value when the A. Stock's beta is strickly less than the market beta B. Stock's required return is strictly less than the constant growth rate in dividends C. Stock's growth rate in dividends is strictly greater than zero D. Stock pays dividends
The dividend growth model of stock evaluation relies on several assumptions that might not be true in the real world. What are they?
Assuming that the stock price follows a geometric Brownian motion, is it a Markov process when the coefficient is not constant?
A normal yield curve a.has an upward slope b.is a sign of a coming recession c.indicates that the interest rate will decrease in the future d.All of the above.
If we assume that inflation, the real cost of capital and the nominal cost of capital are always positive, which of the following statements is true? Question 3Select one: a. The expected inflation rate will always be greater than the nominal cost of capital. b. The nominal cost of capital will always be greater than the real cost of capital. c. The real cost of capital will always be greater than the nominal cost of capital. d. The expected inflation rate will always be greater than the real cost of capital.
If the intrinsic value of a stock is below the current market price, over time we can expect buy orders to exceed sell orders, causing the price to rise buy and sell orders to be evenly matched, keeping the price at its current level sell orders to exceed buy orders, causing the price to rise sell orders to exceed buy orders, causing the price to fall buy orders to exceed sell orders, causing the price to fall
What effect do increasing inflation expectations have on the required returns of investors in common stock?
Both EV-to-EBITDA and PE multiples can be linked to interest rates through the discount rate used in discounted cash flow valuation. Holding all else equal, when discount rates are higher, valuation ratios are lower. Perhaps because of this, we tend to see stock prices as well as, the value of private business transactions decline when interest rates increase. Macroeconomists like to describe interest rates as consisting of two components: the real interest rate component and an expected inflation component. In some situations, increases in interest rates are the result of an increasing real interest rate; in other situations, the cause of an interest rate increase is an increase in expected inflation. How might valuation ratios be expected to respond to an interest rate increase generated by an increase in expected inflation versus an interest rate increase that represents an increase in real interest rates?
1.
A higher growth rate (g) will affect the P/E ratio as follows Question 9 options: 1) Increase the earnings multiplier (P/E ratio) 2) Decrease the earnings multiplier 3) It depends upon the growth rate of the required return of the stock 4) None of the above
Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a. Stock B must have a higher dividend yield than Stock A. b. Stock A must have a higher dividend yield than Stock B. c. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. d. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. e. If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

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The constant growth model sometimes yields negative values for stocks, when growth rates exceed the discount rate. O True O False