Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 7.4, Problem 7.14RQ
Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm's risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growth rate of dividends is expected to increase.
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Students have asked these similar questions
How could you use the nonconstant growth modelto find the value of the stock? Here you can assumethat the expected growth rate starts at a high level,then declines for several years, and finally reachesa steady state where growth is constant.
1. The rate at which a stock's price is expected to appreciate (or depreciate) is called the
yield.
A. current
B. total
C. dividend
D. capital gains
2. The underlying assumption of the dividend growth model is that a stock is worth:
A. the present value of the future income that the stock generates.
B. the same amount to every investor regardless of his desired rate of return.
C. an amount computed as the next annual dividend divided by the market rate of retum.
D. an amount computed as the next annual dividend divided by the required rate of return.
3. The total rate of return earned on a stock is composed of which two of the following?
1. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
A. I and II only
B. I and IV only
C. II and III only
D. III and IV only
4. Which one of the following correctly defines the constant dividend growth model?
A. R = (D₁ Po) + g
B. Po = (D₁R) + g
C. R=(Po Do) + g
D. Po = Do ] (R-g)
5. How much are you willing to pay for one…
The dividend growth model
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.
Chapter 7 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.9RQCh. 7.3 - Describe, compare, and contrast the following...
Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.13RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 7.1STPCh. 7 - Learning Goal 5 ST7-2 Free cash flow valuation...Ch. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Preferred dividends Acura Labs Inc. has an...Ch. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Learning Goal 4 P7- 11 Common stock value:...Ch. 7 - Prob. 7.12PCh. 7 - Prob. 7.13PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Learning Goal 5 P7-17 Free cash flow valuation...Ch. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Integrative: Risk and valuation Hamlin Steel...Ch. 7 - Prob. 7.25P
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- One stock valuation model holds that the value of a share of stock is a function of its futuredividends, and that the dividends will increase at an annual rate which will remain unchangedover time. This stock valuation model is known as the * A.approximate yield model. B.holding period return model. C.constant growth dividend valuation model. D.dividend reinvestment model.arrow_forwardWhich of the following statements is true about the constant dividend growth model? Group of answer choices 1. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to no change in the value of the stock 2. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock 3. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a increased value of the stockarrow_forwardWhich one of the following is an underlying assumption of the dividend growth model? - A stock's value changes in direct relation to the required return. - A stock has the same value to every investor. - The dividend growth rate is inversely related to a stock's market price. - A stock's value is equal to the discounted present value of the future cash flows that it generates. - Stocks that pay the same annual dividend have equal market values.arrow_forward
- 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. provide an explanation for the choice.arrow_forwardThe dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstancesarrow_forwardWhich of the following will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreasesarrow_forward
- 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: Group of answer choices An increase in all stock values. Negative stock values. An increase or a decrease in all stock values. A decrease in all stock values. All stock values to remain constant.arrow_forwardYou've estimated the following expected returns for a stock, depending on the strength of the economy: State (s) Probability Expected return Recession 0.1 -0.05 Normal 0.5 0.06 Expansion 0.4 0.11 What is the expected return for the stock? What is the standard deviation of returns for the stock?arrow_forwardWhich statement is NOT correct? The distribution of returns does not affect the expected average rate of return. To find the dividend yield, we can subtract the capital gain yield from the total stock return. Average geometric return is a better indicator than the average arithmetic return for the growth. Wider the distribution of return, riskier is the investment. The current risk premium for U.S. Treasury bills is 0%.arrow_forward
- Assume you are using the dividend growth model to value stocks. If you expect the inflation rate to increase, you should also expect: O A. market value of all stocks to remain constant as the dividend growth will offset the increase in inflation. B. stocks that do not pay dividends to decrease in price while dividend paying stocks maintain a constant price. C. market value of all stocks to decrease, all else equal. ype here to search 10:12 10/18/2 PrtSen Home Endarrow_forwardAn analyst has estimated how a particular stock’s return will vary depending on what will happen to the economy. What is the coefficient of variation on the company's stock? OF THEECONOMY PROBABILITY OFSTATE OCCURRING STOCK'S EXPECTEDRATE IF THISSTATE OCCURS Recession Below Average Average Above Average Boom .10 .20 .40 .20 .10 (.60) (.10) .15 .40 .90arrow_forwardWhich statement is NOT correct? Multiple Choice O O O As the payout ratio goes up, the stock price also goes up. DDM can be used to calculate the terminal value. According to DDM, the discount rate should be greater than the growth rate of dividends. According to DDM formula, there is a one period lag between the times of stock price and the dividend payment. If the payout ratio is fixed, the growth rates of earnings and dividends are same.arrow_forward
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