A stock is expected to pay a year-end dividend of $2.00, i.e., D₁ = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, then which of the following statements is CORRECT?a. The constant growth model cannot be used because the growth rate is negative.b. The company's dividend yield 5 years from now is expected to be 10%.c. The company's current stock price is $20.O d. The company's expected capital gains yield is 5%.e. The company's expected stock price at the beginning of next year is $9.50.

To answer:A contract's acceptance or rejection is contingent upon the discount rate that is applied…

Answered: A stock is expected to pay a year-end…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = −5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT? Group of answer choices The constant growth model cannot be used because the growth rate is negative. The company's dividend yield 5 years from now is expected to be 10%. The company's current stock price is $20. The company's expected stock price at the beginning of next year is $9.50.
DAS Co. is preparing its financial forecast for next year and its AFN is negative. This means that Select one: O a. the predicted change in total assets must be negative. O b. sales growth must be negative. O c. the dividend payout ratio must be greater than the predicted growth rate in sales. O d. the predicted change in spontaneous liabilities must be greater than the predicted change in total assets.
If you have the assumption that a firm willl grow its dividends at a high constant rate for a few years and then later on its growth will significantly drop to 0%, then.... It can either be a constant, Shifting, negative, or no growth. Model
Franklin Corporation is expected to pay a dividend of $1.24 per share at the end of the year (D1 = $1.24). The stock sells for $32.40 per share, and its required rate of return is 7.2%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate? (Round your answer to 2 decimal places.) Please work out the problem do not use excel.
The dividend growth model CANNOT be used in which of the following? a. When dividends are expected to grow every year. b. When the payout ratio is constant.c. When dividends are expected to grow every quarter. d. When the payout is greater than the amount earned.
2. If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growthwould be 100%, but the annual growth rate would be less than 10%. True or false? Explain. (Hint: Solve for the interest rate. Make sure you put the PV or FV as a negative number.)
Company DELTA has just paid a dividend of $1.15. The required rate if return on the stock is 13.4% and investors expect the dividend to grow at a constant rate of 8% in the future. a)Calculate the current stock value using the Gordon Constant growth model. b)Evaluate Gordon growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results?
XYZ company has just paid a dividend of $1.15. The required rate of return on the stock is 13.4%, and investors expect the dividend to grow at a constant 8% in the future. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]
Suppose that Do = $1.00 and the stock's last closing price is $15.85. It is expected that earnings and dividends will grow at a constant rate of g = 3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium, and the most appropriate required rate of return is rs = 10.00%. The dividend received in period 1 is D1 = $1.00 × (1+0.0350) = $1.04 and the estimated intrinsic value in the same period is based on the D2 constant growth model: P₁: TS-8 Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period. Activity Frame Dividend Price PV t 10.00% Period (Dollars) (Dollars) (Dollars) 0 $1.00 $15.85 1 1.03 16.46 $0.94 2 1.07 17.08 $0.97 3 1.11 17.69 $1.01 4 1.15 18.31 $0.97 5 1.19 18.92 $0.94 The dividend yield for period 1 is and it will The capital gain yield expected during period 1 is and it will each period. each period. If it is…
Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate of g = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium, and the most appropriate required rate of return is rs = 9.00%. The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on the constant growth model: P₁ = P² Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period. Price (Dollars) $26.25 PV of dividend at 9.00% (Dollars) Dividend Period (Dollars) 0 $1.00 1.05 1 2 3 4 5 The dividend yield for period 1 is The capital gain yield expected during period 1 is 4.00% O 5.00% and it will 9.00% If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out…
Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 5%. Its expected earnings this year are $2 per share. Complete the following table. (Leave no cells blank. Enter a zero, wherever necessary. Do not round intermediate calculations. Round growth rate to two decimal places.) Plowback Ratio Growth Rate Stock Price P/E Ratio a. 0 % b. 0.40 % c. 0.60 %
Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 10%. Its expected earnings this year are $4 per share. Complete the following table. (Leave no cells blank. Enter a zero, wherever necessary. Do not round intermediate calculations. Round growth rate to two decimal places.) a. b. C. Plowback Ratio 0 0.40 0.80 Growth Rate Stock Price P/E Ratio % % %

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