Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
21
27) In applying the variable-growth dividend valuation model to a company's stock, analysts
frequently define the growth rate, g, as equal to
A) ROE multiplied by the firm's retention rate.
B) ROE divided by the dividend payout ratio.
C) the dividend payout ratio multiplied by the firm's retention rate.
D) P/E multiplied by the dividend payout ratio.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
28) A company has an annual dividend growth rate of 5% and a retention rate of 40%. The
company's dividend payout ratio is
A) 35%.
B) 40%.
C) 45%.
D) 60%.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
29) Which of the following statements concerning the constant-growth dividend valuation
model is (are) correct?
I. One simple method of estimating the dividend growth rate is to analyze the historical
pattern of dividends.
II. The expected total return equals the return from capital gains plus the return from dividends
paid.
III. The model is applicable to growth firms with initially high growth rates.
IV. The intrinsic value calculated using this method can change from one investor to another if
their risk-return payoffs differ.
A) I and IV only
B) II and III only
C) I, II and IV only
D) I, II and III only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
22
30) The variable-growth dividend valuation model
A) develops the value of a stock using the future value of dividends minus a rate of capital gain
growth.
B) is valuable because it accounts for the general growth patterns of most companies.
C) is invalid if at any point in time the growth rate exceeds the required rate of return.
D) assumes the rate of dividend growth will vary indefinitely.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
31) In general, the higher the retention ratio
A) the higher the future growth rate of the company.
B) the higher the dividends per share of common stock.
C) the higher the future debt-equity ratio.
D) the lower the future book value per share.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
32) Martin's Inc. is expected to pay annual dividends of $2.50 a share for the next three years.
After that, dividends are expected to increase by 3% annually. What is the current value of this
stock to you if you require a 9% rate of return on this investment?
A) $39.47
B) $40.11
C) $41.81
D) $42.92
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
33) MBA Inc. will pay a dividend for the first time at the end of 2016. It projects the following
dividend per share:
2016 $1.50
2017 $2.00
2018 $2.50
Beginning with 2016 dividends will grow at 4% per year. The required rate of return is 12%.
The intrinsic value of MBA shares is
A) $25.37.
B) $27.85.
C) $28.96.
D) $38.50.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
34) DMC3 Inc. will pay no dividend for 2016 or 2017. At the end of 2018, it will pay a
dividend of $1.50.
Thereafter dividends will grow at 4% per year. The required rate of return is 10%. The
intrinsic value of DMC3 shares is (assume you are at the beginning of 2016)
A) $34.61.
B) $26.00
C) $24.91.
D) $20.66.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
24
35) WaterCo is a manufacturer of boat parts and has been in business only a few years. Its
board of directors decided to start paying a dividend to help boost the attractiveness of its stock.
The dividend will be $0.50 per share next year. After that dividends will increase by 4 percent
per year. The company has a beta of 1.6. The market rate of return is 8% and the T-bill rate is
3%. Should you purchase shares in this firm at the current market price of $6.98 per share?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
36) The common stock of Peachtree Paper, Inc., is currently selling for $40 a share. A dividend
of $2.00 per share was just paid. You are estimating that this dividend will grow at a constant
rate of 10%.
(a) Using the constant growth DVM model, what is your required rate of return if $40 is a
reasonable trading price? (Show all work.)
(b) If Peachtree Papers is a new company that produces a relatively unknown product, is the
constant growth model a good valuation method for a potential investor to use? Justify your
answer.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
25
Copyright © 2017 Pearson Education, Inc.
8.5 Learning Goal 5
1) A stock's internal rate of return (IRR) is the discount rate that cause the present value of
future dividends and the price at which a stock is expected to be sold to equal the current price
of the stock.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) Neither the P/E approach nor the cash flow to equity approach rely on dividends as the key
input into the valuation of a stock.
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 5
3) The free cash flow to equity approach does not require that a stock pay dividends.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
4) The investor's internal rate of return is always equal to the firm's rate of return on equity.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5) The value of a stock using the price to cash flow approach is to multiply the P/E ratio times
operating cash flow divided by the number of shares outstanding.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) High price/sales multiples often go with high profit margins.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26
7) Stocks trading at high price to book value multiples may be especially attractive to bargain
hunters.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
8) Which of the following statements concerning the Price to Cash-Flow approach to stock
valuation are true?
I. The Price to Cash-Flow method works just as well for non-dividend paying stocks as it does
for dividend-paying stocks.
II. The Price to Cash-Flow calculate s the intrinsic value of a stock as the present value of
future cash flows.
III. The Price to Cash-Flow ratio divides the market price of one share of stock by cash flow
per share.
IV. The Price to Cash-Flow method does not directly calculate the intrinsic value of a share.
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II and III only
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
9) Commonly used multiples for determining a stock's value include
I. price to earnings.
II. price to sales.
III. price to cash flow.
IV. price to dividends.
A) I, II and III only
B) I, III and IV only
C) II, III and IV only
D) I, II, III and IV
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
27
10) The intrinsic value of a stock is greater than its current market price if
A) The market price is higher than the present value of expected future cash flows.
B) the stock's P/E ratio is higher than the market's average P/E ratio.
C) the stock's IRR exceeds the required rate of return.
D) the stock's P/CF ratio is higher than the market's average P/CF ratio.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
11) Zephyr Inc. sells wind based systems for generating electricity. The company pays no
dividends, but you estimate the stock will be worth $50 per share 5 years from now and you
require a 15% rate of return for stock investments of this type. What price should you be
willing to pay for this stock?
A) $12.50
B) $24.86
C) $43.48
D) $57.50
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
12) Ivonne has bought shares of RIO, Inc. stock for $25.00 per share. She expects a 1.00
dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to
sell the stock for $28.75. What is Ivonne's required rate of return?
A) 4.0%
B) 11.6%
C) 15.2%
D) 24.0%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
