Finance 310 chapter 9

If markets are in equilibrium, which of the following conditions will exist?

Each stock's expected return should equal its required return as seen by the marginal investor.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6.0%

The stock's expected dividend yield and growth rate are equal.

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

The stock's price one year from now is expected to be 5% above the current price.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9%

These two stocks must have the same dividend yield. 10-7=3 12-9=3

. An increase in a firm's expected growth rate would cause its required rate of return to

possibly increase, possibly decrease, or possibly remain constant.

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price $30 $30 Expected growth (constant) 6% 4% Required return 12% 10%

One year from now, Stock X's price is expected to be higher than Stock Y's price.

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Some class or classes of common stock are entitled to more votes per share than other classes.

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

the stock is a good buy.

The preemptive right is important to shareholders because it

protects the current shareholders against a dilution of their ownership interests.

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12%

A's expected dividend is $0.75 and B's expected dividend is $1.20.

Which of the following statements is CORRECT?

a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. e. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. ANSWER C

Which of the following statements is CORRECT?

a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b. Two firms with the same expected dividend and growth rate must also have the same stock price. c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. ANSWER A