Equity Stock Valuation
Assess your understanding of equity stock valuation. This test covers topics of dividend discount models, intrinsic value, zero growth model, one stage growth model. etc.
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Which of the following do financial analysts consider least important when assessing the long-run economic and financial outlook of a company?
Prospects of the relevant industry.
Expected return on equity.
Expected changes in EPS.
General economic conditions.
Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return?
The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?
Which of the following best describes the constant-growth dividend discount model?
It is the formula for the present value of an ordinary annuity.
It is the formula for the present value of a finite, uneven cash flow stream.
It is the formula for the present value of a growing annuity.
It is the formula for the present value of a growing perpetuity.
Corporation B is a normal-growth company that expects to earn 13% on reinvested earnings. If the company pays 30% of its earnings as dividends, what will be the stock’s dividend growth rate?
If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?
The stock has a low level of risk.
The market is undervaluing the stock.
The stock offers a high dividend payout ratio.
The market is overvaluing the stock.
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Which one of the following statements is correct concerning the two-stage dividend growth model?
G1 cannot be negative.
Pt = Dt/R.
G1 must be greater than G2.
G1 can be greater than R.
In the formula ke = (D1/P0) + g, what does g represent?
the expected dividend yield from a common stock.
the dividend yield from a preferred stock.
the expected price appreciation yield from a common stock.
the interest payment from a bond.
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
an increase in all stock values.
all stock values to remain constant.
dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.
a decrease in all stock values.
Which of the following is equal to the present value of all cash proceeds received by a stock investor?
Dividend payout ratio.
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
pay an increasing dividend for a period of time and then cease paying dividends altogether.
pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year.
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
increase the dividend amount every other year.
Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today?
Supernormal growth is a growth rate that:
exceeds a firm's previous year's rate of growth.
is unsustainable over the long term.
is both positive and follows a year or more of negative growth.
is generally constant for an infinite period of time.
Which of the following is another name for the required return on a stock?
Dividend payout ratio.
Virgin Airlines will pay a $4 dividend next year on its common stock, which is currently selling at $100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever?
Which one of the following is an underlying assumption of the dividend growth model?
A stock has the same value to every investor.
A stock's value is equal to the discounted present value of the future cash flows which it generates.
A stock's value changes in direct relation to the required return.
Stocks that pay the same annual dividend have equal market values.
Zeta Corporation can reinvest net income to earn 18% per year. What will be Zeta’s long-term dividend growth rate if Zeta constantly pays out 25% of earnings as dividends?
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