Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 4, Problem 2PS
“You say stock price equals the present value of future dividends? That’s crazy! All the investors I know are looking for
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1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability?
2. What is the relationship between the concepts of net present value and shareholder wealth maximization?
3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.
2. I need help with multiple choice finance home work question
Due to the ___________, the total rate of return on a stock can be positive even when the stock's price decreases.
Real rate of return.
Capital appreciation.
Supernormal growth.
Interest yield.
Dividend yield.
Apart from using PE ratio, what is another way of valuing the stock price? if we have the EPS, Share Price, Dividend Per Share, ROE and the discount rate (R).
And what are the assumptions and the limitations of this model?
What can be said about the dividend growth model? Similarly what can be said about the capital asset pricing model?
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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- Particulars 1. Discount rate АВС XYZ 18.5% 14.25% Not 2. Historical growth rate 2.2218% available 3. Sustainable growth 4.5% 20% rate 4. Fundamental value of stock using dividend growth model through historical growth rate 5. Fundamental value of stock using dividend growth model through sustainable growth rate 6. Fundamental value of stock using residual income growth model through historical growth rate 7. Fundamental value of stock using residual income growth model through sustainable growth rate Not Tavailable 3395 Not available 3953 Not 427.30 available 420.35 1 96.5arrow_forwardBasic Finance question: 1. In the Gordon Growth model, an increase in Ke will have what effect on the price of th stock? Select one of the following: a. none of the above b. No effect c. Raise of Valor d. Decrease the valuearrow_forwardA dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.arrow_forward
- “The constant-growth model should not be used with just any stock.” Explain with reasons the assumptions used by analysts when using the constant- growth dividend model.arrow_forwardHow would you use the dividend yield model to value the price of a stock if it presently does not pay dividends but is expected to pay dividends in the futurearrow_forward"The dividend discount model is used to find the price of a stock based on the expected dividends received by the shareholder and the discount rate. Therefore, all else constant, the price of a share of stock will increase if the discount rate decreases." A) True B) Falsearrow_forward
- Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories? Select one: a. the clientele effect b. the expectations theory c. the residual dividend theory d. the information effect Question 19 In perfect capital markets there Select one: a. are no income taxes. b. are no flotation costs. c. All of these.arrow_forwardWhich of the following statements is FALSE? Select one: O In recent years, an increasing number of firms have replaced dividend payouts with share repurchases. O The price of a share of stock is equal to the present value of the expected future dividends it will pay. O The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it. O The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders, O An investor might generate cash by choosing to sell the shares at some future date. O Fulture dividend payments and stock prices are not known with certainty: rather these values are based on the investor's expectations at the time the stock is purchased. O The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price. O In the dividend discount model, we implicitly assume that any cash paid out to the shareholders takes the…arrow_forwardAssuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio a)What is the difference between the required return on equity and actual return on equity? Can they be equal? Which one would be used to compute the stock price?arrow_forward
- АВС XYZ Discount rate (r) Historical growth rate of 0.015+2*0.085=0.185 0.015+1.5*0.085=0.142 (58/30)^(1/30)-1=0.022 Not available. Cannot dividends compute without dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the 467*(1+0.185)/(0.185-0.045) dividend growth model with =3953 the sustainable growth rate Fundamental value using residual income growth 0.15*(1-0.7)=0.045 467*(1+0.185)/(0.185-0.022) 0.2*(1-0)=0.2 Not available. Cannot =3395 compute without dividends Not available. Cannot compute without dividends 80*(1+0.022)-(550*0.022)/(0. 185-0.022)=427.36 Not available. Cannot compute without dividends model with the historical growth rate Fundamental value using the 80*(1+0.045)-(550*0.045)/(0. residual income growth 12*(1+0.2)-(100*0.2)/(0.142- 0.2)=96.5 185-0.045)=420.35 model with the sustainable growth ratearrow_forwardAnswer the following questions: A. Explain why the price of many individual stocks still goes down, even when the overall stock market goes up. b. How can you avoid the value of your stock from going down?arrow_forwardWhat are efficient markets? Imagine if the price of a stock is going up and financial markets are efficient what can you tell us about the nature of the stock? What if the markets are inefficient then how would you react to increasing prices for a particular stock?arrow_forward
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Internal Rate of Return (IRR); Author: The Finance Storyteller;https://www.youtube.com/watch?v=aS8XHZ6NM3U;License: Standard Youtube License