Chapter 9 Valuing Stocks — 9.1 The Dividend-Discount Model

Which of the following is NOT a way that a firm can increase its dividend?

• By increasing its retention rate

• By decreasing its shares outstanding

• By increasing its earnings (net income)

• By increasing its dividend payout rate

Which of the following statements is false regarding profitable and unprofitable growth?

• If a firm wants to increase its share price, it must cut its dividend and invest more.

• If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend.

• A firm can increase its growth rate by retaining more of its earnings.

• Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.

Which of the following statements is FALSE?

• Estimating dividends, especially for the distant future, is difficult.

• A firm can only pay out its earnings to investors or reinvest their earnings.

• Successful young firms often have high initial earnings growth rates.

• According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate.

Which of the following statements is FALSE?

• We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.

• As firms mature, their growth slows to rates more typical of established companies.

• The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.

• The simplest forecast for the firm's future dividends states that they will grow at a constant rate, g, forever.

Which of the following statements is FALSE?

• A common approximation is to assume that in the long run, dividends will grow at a constant rate.

• The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate.

• There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends.

• During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Which of the following statements is FALSE?

• As firms mature, their earnings exceed their investment needs and they begin to pay dividends.

• Total return equals earnings multiplied by the dividend payout rate.

• Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV.

• We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

Which of the following formulas is INCORRECT?

Which of the following formulas is INCORRECT?

• earnings growth rate = retention rate × return on new investment

• 3.40%

• 3.65%

• 4.00%

• 4.20%

• 4.0%

• 6.4%

• 8.2%

• 10.0%