FFM (Ch.9 &10) Stocks and WACC

The intrinsic value of a stock represents:

• Its book value

• Its market price

• The present value of expected future cash flows

• The total assets of the firm

• The net income per share

Common stockholders have the right to:

• Receive fixed interest payments

• Elect the board of directors

• Set company policy

• Approve dividends

• Demand buybacks

The preemptive right allows existing shareholders to:

• Block mergers

• Sell shares at a premium

• Maintain their proportionate ownership

• Demand dividends

• Convert shares to bonds

In the constant growth DDM, the stock value is:

• D₁ × (1 + g) ÷ (r - g)

• D₀ ÷ r

• D₁ ÷ (r - g)

• D₀ × r

• D₁ ÷ g

If g = r in the constant growth model, the valuation:

• Becomes zero

• Goes to infinity

• Is undefined

• Matches book value

• Reflects net income

The dividend yield is calculated as:

• D₁ / P₀

• g / r

• P₀ / D₁

• r - g

• P₁ - P₀

The capital gains yield is equal to:

• r - D₁

• g

• r + g

• D₀ / P₀

• Dividend payout ratio

If a firm pays no dividends, its value under DDM is:

• Zero

• Infinity

• Cannot be determined

• Equal to EPS

• Based on expected capital gains

What does g represent in the dividend discount model?

• Risk-free rate

• Capital structure

• Expected dividend growth rate

• Cost of capital

• Beta

The required rate of return for a stock depends on:

• Net income and book value

• Past dividend levels

• Beta and risk premium

• Dividend policy

• Return on assets