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Chapter 9 Review Session

Chapter 9 Review Session - Chapter 9 Review Session 2007...

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© 2007 Robert H. Smith School of Business University of Maryland “Chapter 9 Review Session”

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© 2007 Robert H. Smith School of Business University of Maryland Chapter 9 Review Session 1. Assume that a company’s dividends are expected to grow at a rate of 25% per year for 5 years and then to slow down and to grow at a constant rate of 5% thereafter. The required (and expected) total return is expected to remain constant at 12%. Which of the following statements is true? a. The dividend yield will be higher in the early years and then will decline as the annual capital gains yield gets larger and larger, other things held constant. b. Right now, it would be easier (require fewer calculations) to find the dividend yield expected in year 7 than the dividend yield expected in year 3. c. The stock price will grow each year at the same rate as the dividends. d. The stock price will grow at a different rate each year during the first 5 years, but its average growth rate over this period will be the same as the average growth rate in dividends; that is, the average stock price growth rate will be (25+5)/2. e. Statements a,b,c, and d are all false
© 2007 Robert H. Smith School of Business University of Maryland Chapter 9 Review Session 1. B is correct r = D/P + g, where D/P = dividend yield 12 = D/P + 5, so D/P = 7% You would have more complicated calculations for year 3 because there is a non-constant growth. A is incorrect. The capital gains (fueled by the growth rate) is high in the early years and then gets lower. C and d are incorrect. Average g = 25+5/2 = 15%. 15% dividend growth > 12% stock growth

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© 2007 Robert H. Smith School of Business University of Maryland Chapter 9 Review Session 1. Which of the following statements is true?
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Chapter 9 Review Session - Chapter 9 Review Session 2007...

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