CHAPTER 8
Stock Valuation
II. CONCEPTS
VALUATION OF ZERO GROWTH STOCK
c 26. The James River Co. pays an annual dividend of $1.50 per share on its common stock. This dividend amount has been constant for the past 15 years and is expected to remain constant. Given this, one share of James River Co. stock: a. is basically worthless as it offers no growth potential. b. has a market value equal to the present value of $1.50 paid one year from today. c. is valued as if the dividend paid is a perpetuity. d. is valued with an assumed growth rate of 3 percent. e. has a market value of $15.00.
VALUATION OF ZERO GROWTH STOCK
e 27. The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the
market price of Kenwith stock will:
a. also remain constant. b. increase over time. c. decrease over time. d. increase when the market rate of return increases. e. decrease when the market rate of return increases.
DIVIDEND YIELD VS. CAPITAL GAINS YIELD
c 28. The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing
that amount by 5 percent each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing their dividend by 3 percent annually. Given this, it can be stated with certainty that the _____ of the Koster Co. stock is greater than the _____ of the Keyser Co. stock.
a. market price; market price b. dividend yield; dividend yield c. rate of capital gain; rate of capital gain d. total return; total return e. capital gains; dividend yield
DIVIDEND GROWTH MODEL d 29. The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point of time. III. states that the market price of a stock is only affected by the amount of the
dividend.
IV. considers capital gains but ignores the dividend yield.
a. b. c. d. e. I only II only
IIIand IV only I and II only I, II, and III only
DIVIDEND GROWTH MODEL
b 30. The underlying assumption of the dividend growth model is that a stock is worth: a. the same amount to every investor regardless of their desired rate of return. b. the present value of the future income which the stock generates. c. an amount computed as the next annual dividend divided by the market rate of
return.
d. the same amount as any other stock that pays the same current dividend and has the
same required rate of return.
e. an amount computed as the next annual dividend divided by the required rate of
return.
DIVIDEND GROWTH MODEL
c 31. Assume that you are using the dividend growth model to value stocks. If you expect
the market rate of return to increase across the board on all equity securities, then you should also expect the:
a. market values of all stocks to increase, all else constant. b. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. c. market values of all stocks to decrease, all else constant. d. stocks that do not pay dividends to decrease in price while the dividend-paying
stocks maintain a constant price.
e. dividend growth rates to increase to offset this change.
NONCONSTANT GROWTH
c 32. Latcher’s Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then
increasing that amount by 3 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today’s value.
a. 4 b. 5 c. 6 d. 7 e. 8
NONCONSTANT GROWTH
d 33. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4 percent annually. The first
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