The dividend growth model: a. is only as reliable as the estimated rate of growth. b. can only be used if historical dividend information is available. C. considers the risk that future dividends may vary from their estimated values. d. applies only when a firm is currently paying dividends. e. uses beta to measure the systematic risk of a firm.
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- 5. An optimal dividend policy is one that takes into consideration that:a) Dividends should only be distributed based on the profits of the last period.b) Dividends can be distributed even if the company recorded losses in the last period.c) The balance between current dividends and future growth is achieved, maximizing the value of the company.d) It manages to attract investors who have a predilection for relatively high risks.Assume all firms have the same expected dividends. If they have different expected returns, how will their market values and expected returns be related? What about the relation between their dividend yields and expected returns? (Select the best choice below.) O A. Firms with high expected returns will have high market values and low dividend yields. O B. Firms with low expected returns will have low market values and low dividend yields. O C. Firms with low expected returns will have high market values and low dividend yields. O D. Firms with high expected returns will have high market values and high dividend yields.What is the added value of the multi-period models of discounted cash-flows over the constant-growth model in equity valuation analysis? They allow the firm’s dividend growth to vary over time. They allow the investor to account for the investment’s risk. They are more complicated to estimate. They forecast a higher valuation.
- Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm's only activity and that the firm will close one year from today. The company is obligated to make a $5,400 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability .50 .50 Bad Good Low-Volatility Project Payoff $ 5,400 6,550 High-Volatility Project Payoff $ 4,800 7,150 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the company's equity if the…Which statement below is incorrect? Select one: A. Compared to interview, survey is more suitable to ask standardised questions. B. If a firm has more intangible assets, according to the trade-off theory, it is more likely to have a higher leverage. C. If a firm is more profitable, according to the pecking order theory, it should use less debt for financing. D. The CAPM model implies that a stock with a higher beta has a higher return on average.Which statement is correct, all else held constant? A. If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. B. The aftertax cost of debt increases when the market price of a bond increases. C. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. D. Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.
- Assuming that the required rate of return is determined by the CAPM, explain how you would usethe dividend growth model to estimate the pricefor Stock i. Indicate what data you would need,and give an example of a “reasonable” value foreach data input. How would this be differentif you used free cash flows as the basis for yourevaluation?If you were to argue that the firm's cost of equity, rs, increases as the dividend payout decreases, you would be making an argument ____ with MM's dividend irrelevance theory, and ____ with the theory that investors prefer dividends received in the current period rather than capital gains received in the future. Group of answer choices inconsistent; inconsistent consistent; inconsistent inconsistent; consistent consistent; consistent The argument above does not make sense; neither theory involves the cost of equity capital.1. A well-researched valuation is timeless.(true or false with reason) 2. Firms with same correlation with the market portfolio may not have the same beta.(true or false with reason)3. Historical equity risk premium should be estimated using most recent data to reflect current conditions.(true or false with reason)4. A firm with high growth rate could still destroy shareholder value.(true or false with reason)5. Firms that do not pay dividends cannot be valued using the dividend discount model but can be valued using the residual income model.(true or false with reason)6. A company’s cost of debt is the contracted rate it pays on its outstanding debt.(true or false with reason)7. Free Cash Flow to Equity can be less than net income.(true or false with reason)8. An increase in stock price leads to lower implied cost of equity.(true or false with reason)9. The dividend discount model will generally undervalue stocks relative to free cash flow to equity model.(true or false with…
- Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset SelectionA stock has a negative beta and does not pay dividends. Given this information, a model that is valid for calculating a required return for this stock is the A. Constant Dividend Growth Model (DCF) B. Capital Asset Pricing Model (CAPM) C. Internal Rate of Return Model (IRR) D. Weighted Average Cost of Capital Model (WACC)Which of the following statements is most likely FALSE? ... O A. We should use the general dividend discount model to value the stock of a firm with rapid or changing growth. O B. As firms mature, their growth slows to rates more typical of established companies. Oc. The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.