FNAN401 CH9

Firms may retain all their earnings if they have identified:

positive NPV projects growth opportunities

The ____ ratio is the ratio of this year's retained earnings to net income.

retention

The ratio of this year's retained earnings to net income is called the ______ ratio.

retention

When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same.

retention

A firm with a ______ retention ratio will pay a larger dividend payout ratio.

smaller

Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of ____.

the future sales price dividends

If the growth rate (g) is zero, the capital gains yield is ____.

zero

One objection to the present value analysis of stocks is that investors _____.

are shortsighted.

The ______ can be interpreted as the capital gains yield.

growth rate

The value of a firm is the function of its _____ rate and its _____ rate.

growth; discount

A firm with a ______ retention ratio will have a smaller dividend payout ratio.

larger

Retained earnings this year, return on retained earnings, and earnings this year determine earnings ____ year.

next

Forecasting requires:

assumptions

What is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent?

10%

What is the value of a company that expects to pay a dividend of $1.12 next year, where dividends will grow at 17% for the next two years before leveling off to a constant 2% growth forever. The required rate of return is 9%. Round off the intermediate calculations to two decimal places.

20.57

The dividend yield is determined by dividing next year's expected cash dividend by the ____.

current stock price [Dividend yield = Div1/P0]

A no-dividend firm can still pay off for an investor by ______.

paying high dividends in the future being acquired in the future

All else constant, the dividend yield will increase if the stock price ____.

decreases

Net investment is equal to the total investment minus ____.

depreciation

Earnings next year are a function of which factors?

Earnings this year Retained earnings this year Return on retained earnings [Earnings next year = Earnings this year + Retained earnings this year X Return on retained earnings.]

In the dividend discount model, the expected return for investors comes from which two sources?

Growth rate Dividend Yield

What conditions must be met for a firm to increase value?

Projects must have positive NPVs Earnings must be retained to fund projects

True or false: If the growth rate is larger than the discount rate, the dividend growth model with constant growth does not work.

True

The determinants of a firm's growth rate include which factors?

Return on retained earnings The retention ratio [g = retention ration X return on retained earnings]

Companies with differential growth have dividends that grow _____ in the near term than in the long term.

faster

The value of a firm is the function of its ______ rate and its _______ rate.

growth; discount

A firm may choose to forgo dividends today if growth opportunities are _____.

high

Typically, growth stocks pay a ______ amount of earnings to shareholders while cash cows pay a ______ amount of earnings to shareholders.

small; large

A calculated stock price that discounts earnings instead of dividends will usually be:

too high

Net investment is equal to the ______ minus ____.

total investment; depreciation

If the dividend received next year is $2.25, the discount rate is 8%, and the stock is currently priced at $55, the constant growth rate must be ______%.

3.91

What is the value of a company that expects to pay a dividend of $1.50 next year, where dividends will grow at 10% for the next three years before leveling off to a constant 2% growth forever. The required rate of return is 7%. Round off the intermediate calculations to two decimal places.

36.92

A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.

40 [Div. Growth Rate/Return on Equity = Retention Ratio]

Which of the following refers to a company that pays a small amount of its earnings to its stockholders?

A growth stock

Which type of growth describes a company that grows quickly at first but then grows slower in later years?

Differential growth

Why do no-payout stocks sell at positive prices?

Investors count on future dividends Investors speculate on capital returns if the firm is sold

Since estimation error may be high, what do some financial economists recommend when using the constant-growth dividend discount model?

Use the industry average rate of return for R

A no-dividend firm can pay off for an investor by paying ____ in the future.

dividends

For many companies, steady growth in _____ is an explicit goal.

dividends

The constant-growth model assumes that _________.

dividends change at a constant rate

Which of these factors are used in predicting stock values using the dividend discount model?

Discount rate Growth

Which cases should make one particularly skeptical when estimating the required rate of return?

Zero dividend case When the growth rate is greater than or equal to the discount rate