Scribd
Upload
159 views2 pages

Stocks and Their Valuation: Multiple Choice: Conceptual

This document provides a chapter summary on stocks and their valuation, including key concepts such as: - An increase in a firm's expected growth rate would normally cause the firm's required rate of return to possibly increase, decrease, or remain unchanged. - If the expected rate of return on a stock exceeds the required rate, the stock is experiencing supernormal growth. - Using the constant growth model, two stocks with the same dividend growth rate but different required returns should have different stock prices. - The constant growth model can be used to estimate stock value based on expected future dividends discounted at the required rate of return minus the growth rate.

Uploaded by

Kristel Sumabat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
159 views2 pages

Stocks and Their Valuation: Multiple Choice: Conceptual

This document provides a chapter summary on stocks and their valuation, including key concepts such as: - An increase in a firm's expected growth rate would normally cause the firm's required rate of return to possibly increase, decrease, or remain unchanged. - If the expected rate of return on a stock exceeds the required rate, the stock is experiencing supernormal growth. - Using the constant growth model, two stocks with the same dividend growth rate but different required returns should have different stock prices. - The constant growth model can be used to estimate stock value based on expected future dividends discounted at the required rate of return minus the growth rate.

Uploaded by

Kristel Sumabat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

CHAPTER 8

STOCKS AND THEIR VALUATION

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Conceptual

Easy:
Required return Answer: e Diff: E
1. An increase in a firm’s expected growth rate would normally cause the
firm’s required rate of return to

a. Increase.
b. Decrease.
c. Fluctuate.
d. Remain constant.
e. Possibly increase, possibly decrease, or possibly remain unchanged.

Required return Answer: d Diff: E


2. If the expected rate of return on a stock exceeds the required rate,

a. The stock is experiencing supernormal growth.


b. The stock should be sold.
c. The company is probably not trying to maximize price per share.
d. The stock is a good buy.
e. Dividends are not being declared.

Required return Answer: a Diff: E


3. Stock A has a required return of 10 percent. Its dividend is expected to
grow at a constant rate of 7 percent per year. Stock B has a required
return of 12 percent. Its dividend is expected to grow at a constant rate
of 9 percent per year. Stock A has a price of $25 per share, while Stock
B has a price of $40 per share. Which of the following statements is most
correct?

a. The two stocks have the same dividend yield.


b. If the stock market were efficient, these two stocks should have the
same price.
c. If the stock market were efficient, these two stocks should have the
same expected return.
d. Statements a and c are correct.
e. All of the statements above are correct.

Chapter 8 - Page 1
Constant growth model Answer: a Diff: E
4. Which of the following statements is most correct?

a. The constant growth model takes into consideration the capital gains
earned on a stock.
b. It is appropriate to use the constant growth model to estimate stock
value even if the growth rate never becomes constant.
c. Two firms with the same dividend and growth rate must also have the
same stock price.
d. Statements a and c are correct.
e. All of the statements above are correct.

Constant growth model Answer: a Diff: E


5. Which of the following statements is most correct?

a. The stock valuation model, P0 = D1/(ks - g), can be used for firms which
have negative growth rates.
b. If a stock has a required rate of return ks = 12 percent, and its
dividend grows at a constant rate of 5 percent, this implies that the
stock’s dividend yield is 5 percent.
c. The price of a stock is the present value of all expected future
dividends, discounted at the dividend growth rate.
d. Statements a and c are correct.
e. All of the statements above are correct.

Constant growth model Answer: c Diff: E


6. A stock’s dividend is expected to grow at a constant rate of 5 percent a
year. Which of the following statements is most correct?

a. The expected return on the stock is 5 percent a year.


b. The stock’s dividend yield is 5 percent.
c. The stock’s price one year from now is expected to be 5 percent higher.
d. Statements a and c are correct.
e. All of the statements above are correct.

Constant growth model Answer: e Diff: E


7. Stocks A and B have the same required rate of return and the same expected
year-end dividend (D1). Stock A’s dividend is expected to grow at a
constant rate of 10 percent per year, while Stock B’s dividend is expected
to grow at a constant rate of 5 percent per year. Which of the following
statements is most correct?

a. The two stocks should sell at the same price.


b. Stock A has a higher dividend yield than Stock B.
c. Currently Stock B has a higher price, but over time Stock A will
eventually have a higher price.
d. Statements b and c are correct.
e. None of the statements above is correct.

Chapter 8 - Page 2

You might also like