Please write down your choice in the blank before the question. Two points each
ID: 2787060 • Letter: P
Question
Please write down your choice in the blank before the question. Two points each and 10 points in total Which of the following statements about constant growth model is NOT CORRECT? The constant growth model assumes that the firm's dividends will grow forever at a constant rate. a. b. Shareholders will earn a constant return from a constant growth firm c. A constant growth firm's share price is expected to grow at a constant rate d. For a constant growth firm, its expected dividend yield will be a constant over time and equal to . the difference between the required return on equity and the estimated constant growth rate. 2. which of the following statements about stock valuation is CORRECT? firms with the same expected dividend and growth rates will also have the b. If a stock has a required rate of return r, = 12%, and its dividend is expected to grow at a c. The price of a stock is the present value of all expected future dividends, discounted at the d. The discounted dividend model takes into consideration the capital gains investors expect to a. Two constant same stock price constant rate of 5%, this implies that the stock's dividend yield is also 5%. dividend growth rate earn on a stock. 3. Which of the following statements is NOT CORRECT? Discounted dividend model is often used to valuate mature, dividend-paying firms. Discounted dividend model cannot be used to valuate firms that have just started paying dividends, because there is no dividend history for us to estimate the growth rate of dividends The price multiple method can be used to valuate a company if publicly traded comparable companies exist. If a company is shrinking, then its share price is expected to decline, yet it still could provide a positive return to shareholders. a. b. c. d· Which of the following does NOT correctly describe what we do to valuate a stock using the two-stage ividend discount model? a. Forecast future dividends during the forecast horizon, and a constant growth rate, g. afterwards Estimate the horizon value using the constant growth model. b.Explanation / Answer
1.
under constant growth model, it is assumes that firm will pay regular dividend at constat growth rate. require rate of return for shareholder is constant forever. dividend yeild in constant growth model is equal to required rate of return minus growth rate.
So option (C), "A constant growth firm's share price is expected to grow at constant rate" is not correct about constant growth model".
option (C) is correct answer.
2.
two constant growth firm with similar expected dividend and growth rate, need not have same stock price. might be required rate of return for both firm is different. Dividend yield is calculated by required return minus growth rate,
the discounted dividend model take into consideration the capital gain investor expect to earn on stock is correct for stock valuation of stock.
Option (D) is correct answer.
3.
Ususally discounted dividend model is used for mature firm that use to pay regular dividend. any firm that pays dividend and expected to pay regular dividend is future can use discounted dividend model to value stock price.
A firm that start paying paying dividend can use discounted dividend model model to evaluate stock.
Option (B) is correct answer.