CHAP9

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

• zero growth

• dividend growth

• capital pricing

• earnings capitalization

• differential growth

Next year's annual dividend divided by the current stock price is called the:

• yield to maturity.

• total yield.

• dividend yield.

• capital gains yield.

• earnings yield.

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

• current

• total

• dividend

• capital gains

• earnings

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

• dual class

• cumulative

• deferred

• preferred

• common

Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:

• retained earnings.

• net income.

• dividends.

• redistributions.

• infused equity.

The constant dividend growth model is:

• generally used in practice because most stocks have a constant growth rate.

• generally used in practice because the historical growth rate of most stocks is constant.

• generally not used in practice because most stocks grow at a non constant rate.

• generally not used in practice because the constant growth rate is usually higher than the required rate of return.

• based on the assumption Dow 30 represents a good estimate of the market index.

The constant dividend growth model:

• assumes that dividends increase at a constant rate forever.

• can be used to compute a stock price at any point of time.

• states that the market price of a stock is only affected by the amount of the dividend.

• considers capital gains but ignores the dividend yield.

The underlying assumption of the dividend growth model is that a stock is worth:

• the same amount to every investor regardless of their desired rate of return.

• the present value of the future income which the stock generates.

• an amount computed as the next annual dividend divided by the market rate of return.

• the same amount as any other stock that pays the same current dividend and has the same required rate of return.

• an amount computed as the next annual dividend divided by the required rate of return.

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:

• market values of all stocks to increase, all else constant.

• market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.

• market values of all stocks to decrease, all else constant.

• stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.

• dividend growth rates to increase to offset this change.

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% 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.

• 4

• 5

• 6

• 7

• 8