Chapter 09 - Stock Valuation
Chapter 09 How to Value Stocks Answer Key
Multiple Choice Questions
1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model. A. zero growth B. dividend growth C. capital pricing
D. earnings capitalization E. differential growth
Difficulty level: Easy
Topic: DIVIDEND GROWTH MODEL Type: DEFINITIONS
2. Next year's annual dividend divided by the current stock price is called the: A. yield to maturity. B. total yield. C. dividend yield. D. capital gains yield. E. earnings yield.
Difficulty level: Easy
Topic: DIVIDEND YIELD Type: DEFINITIONS
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Chapter 09 - Stock Valuation
3. 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 E. earnings
Difficulty level: Easy
Topic: CAPITAL GAINS YIELD Type: DEFINITIONS
4. A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock. A. dual class B. cumulative C. deferred D. preferred E. common
Difficulty level: Easy
Topic: COMMON STOCK Type: DEFINITIONS
5. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called: A. retained earnings. B. net income. C. dividends. D. redistributions. E. infused equity.
Difficulty level: Easy Topic: DIVIDENDS Type: DEFINITIONS
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Chapter 09 - Stock Valuation
6. The constant dividend growth model is:
A. generally used in practice because most stocks have a constant growth rate.
B. generally used in practice because the historical growth rate of most stocks is constant. C. generally not used in practice because most stocks grow at a non constant rate.
D. generally not used in practice because the constant growth rate is usually higher than the required rate of return.
E. based on the assumption Dow 30 represents a good estimate of the market index.
Difficulty level: Medium
Topic: CONSTANT DIVIDEND GROWTH MODEL Type: CONCEPTS
7. The constant 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 of time.
III. states that the market price of a stock is only affected by the amount of the dividend. IV. considers capital gains but ignores the dividend yield. A. I only B. II only
C. III and IV only D. I and II only E. I, II, and III only
Difficulty level: Medium
Topic: CONSTANT DIVIDEND GROWTH MODEL Type: CONCEPTS
8. The underlying assumption of the dividend growth model is that a stock is worth: A. the same amount to every investor regardless of their desired rate of return. B. the present value of the future income which the stock generates.
C. an amount computed as the next annual dividend divided by the market rate of return. D. the same amount as any other stock that pays the same current dividend and has the same required rate of return.
E. an amount computed as the next annual dividend divided by the required rate of return.
Difficulty level: Medium
Topic: DIVIDEND GROWTH MODEL Type: CONCEPTS
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Chapter 09 - Stock Valuation
9. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
A. market values of all stocks to increase, all else constant.
B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.
C. market values of all stocks to decrease, all else constant.
D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.
E. dividend growth rates to increase to offset this change.
Difficulty level: Medium
Topic: DIVIDEND GROWTH MODEL Type: CONCEPTS
10. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value. A. 4 B. 5 C. 6 D. 7 E. 8
Difficulty level: Medium
Topic: DIFFERENTIAL GROWTH Type: CONCEPTS
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Chapter 09 - Stock Valuation
11. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year: A. 3 B. 4 C. 5 D. 6 E. 7
Difficulty level: Medium
Topic: DIFFERENTIAL GROWTH Type: CONCEPTS
12. Differential growth refers to a firm that increases its dividend by: A. three or more percent per year.
B. a rate which is most likely not sustainable over an extended period of time. C. a constant rate of two or more percent per year. D. $.10 or more per year.
E. an amount in excess of $.10 a year.
Difficulty level: Medium
Topic: DIFFERENTIAL GROWTH Type: CONCEPTS
13. The total rate of return earned on a stock is comprised of which two of the following? I. 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. II and IV only E. III and IV only
Difficulty level: Medium
Topic: DIVIDEND YIELD AND CAPITAL GAINS Type: CONCEPTS
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