# 9 - Midterm Review

### 3 terms by matdavid

#### Study  only

Flashcards Flashcards

Scatter Scatter

Scatter Scatter

## Create a new folder

### Which of the following statements is most correct. a. The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative growth rates. b. If a stock has a required rate of return ks = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock's dividend yield is 5 percent. c. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. d. Statements a and c are correct. e. All of the statements above are correct.

Statement a is true; the other statements are false. If a stock's required return is 12 percent and its capital gains yield is 5 percent, then its dividend yield is 12% - 5% = 7%. The expected future dividends should be discounted at the required rate of return.

### If two constant growth stocks have the same required rate of return and the same price, which of the following statements is most correct? a. The two stocks have the same per-share dividend. b. The two stocks have the same dividend yield. c. The two stocks have the same dividend growth rate. d. The stock with the higher dividend yield will have a lower dividend growth rate. e. The stock with the higher dividend yield will have a higher dividend growth rate.

ks = D1/P0 + g. Both stocks have the same ks and the same P0, but may have a different D1 and a different g. So statements a, b, and c are not necessarily true. Statement d is true, but statement e is clearly false.

### Stocks A and B have the same required rate of return and the same expected year-end dividend (D1). Stock A's dividend is expected to 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.

Statements a and b are both false because the required return consists of both a dividend yield (D1/P0) and a growth rate. Statements a and b don't mention the growth rate. Statement c is true because if the required return for Stock A is higher than that of Stock B, and if the dividend yield for Stock A is lower than Stock B's, the growth rate for Stock A must be higher to offset this. Statement d is not necessarily true because the growth rate could go either way depending upon how high the dividend yield is. Statement e is also not necessarily true

Example: