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Homework answers / question archive / The rate of growth can exceed the required return during the variable-growth period without invalidating the variable growth dividend valuation model

- The rate of growth can exceed the required return during the variable-growth period without invalidating the variable growth dividend valuation model.
- The subjective approach to determining a required rate of return for a stock includes

I. the rate of return on a long-term bond.

II. a risk premium for the perceived business risk of the asset.

III. a risk premium for assuming the risk of the market.

IV. the desired rate of return of the individual investor.

A) I and III only

B) II and IV only

C) I, II and IV only

D) I, II and III only - Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par. To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of

A) $9.60.

B) $66.67.

C) $96.00.

D) $150.00. - The required rate of return necessary for the dividend valuation model can be estimated using

A) the Capital Asset Pricing Model.

B) comparisons to the rates of return on stocks of similar risk.

C) a subjective assessment of the return required over and above less risky investments such as government bonds.

D) any or all of the above. - James is willing to settle for a 10% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?

A) James will be have to pay more for the stock than he was willing to pay.

B) Investors with different required rates of return will pay different prices for the stock.

C) James will not be able to buy the stock unless the price changes.

D) James will be happy to buy the stock for less than he was willing to pay. - John requires a 12% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?

A) John will have to pay more for the stock than he was willing to pay.

B) Investors with different required rates of return will pay different prices for the stock.

C) John will not be able to buy the stock unless the price changes.

D) John will buy the stock at a lower price. - A company that wants to maintain both a constant growth rate in dividends and a constant payout ratio will have to

A) grow earnings faster than dividends.

B) increase assets at the same rate as dividends.

C) grow earnings at the same rate as dividends.

D) increase stockholders' equity at the same rate as dividends. - Michelak's Maritime Industries has relatively stable earnings and pays an annual dividend of $2.50 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. If you want to earn 12% on an investment in the common stock of Michelak's, how much should you pay to purchase each share of stock?

A) $12.50

B) $18.88

C) $20.83

D) $25.00 - Winifred, Inc. paid $1.64 as an annual dividend per share last year. The company is expected to increase their annual dividends by 3% each year. How much should you pay to purchase one share of this stock if you require a 9% rate of return on this investment?

A) $18.22

B) $18.77

C) $27.33

D) $28.15 - One stock valuation model holds that the value of a share of stock is a function of its future dividends, and that the dividends will increase at an annual rate which will remain unchanged over time. This stock valuation model is known as the

A) approximate yield model.

B) holding period return model.

C) dividend reinvestment model.

D) constant growth dividend valuation model.

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