Chap.8 homework

Chap.8 homework - CHAPTER 8 STOCKS AND THEIR VALUATION...

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(Difficulty: E = Easy, M = Medium, and T = Tough) Required return Diff: E 1. 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. Constant growth model Diff: E 2. 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 Diff: E 3. 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 Diff: E 4. Stocks A and B have the same required rate of return and the same expected year-end dividend (D 1 ). Stock A’s dividend is expected to CHAPTER 8 STOCKS AND THEIR VALUATION 1
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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. Efficient markets hypothesis Diff: E 5. Which of the following statements is most correct? a. If the stock market is weak-form efficient, then information about recent trends in stock prices would be very useful when it comes to selecting stocks. b. If the stock market is semistrong-form efficient, stocks and bonds should have the same expected return. c. If the stock market is semistrong-form efficient, all stocks should have the same expected return. d. Statements a and c are correct.
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Chap.8 homework - CHAPTER 8 STOCKS AND THEIR VALUATION...

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