PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 4, Problem 6PS
- a. All stocks in an equivalent-risk class are priced to offer the same expected
rate of return . - b. The value of a share equals the PV of future dividends per share.
- c. The value of a share equals the PV of earnings per share assuming the firm does not grow, plus the
NPV of future growth opportunities.
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Students have asked these similar questions
The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances?
g = 0
g > 0
g < 0
g is expected to remain constant over time
under no circumstances
One stock valuation model holds that the value of a share of stock is a function of its futuredividends, and that the dividends will increase at an annual rate which will remain unchangedover time. This stock valuation model is known as the *
A.approximate yield model.
B.holding period return model.
C.constant growth dividend valuation model.
D.dividend reinvestment model.
The possible returns from investing in BestMax share are as follows:
State of economy
Probability of state of economy
Return if state occurs
Strong
0.26
96%
Normal
0.51
12%
Weak
0.23
-83%
Based on the above information,
a. What is 'risk' in the context of financial decision-making? Explain.
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...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 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...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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- The value of an asset is the present value of the expected returns from the asset during theholding period. An investment will provide a stream of returns during this period, and it isnecessary to discount this stream of returns at an appropriate rate to determine the asset’spresent value. A dividend valuation model such as the following is frequent. where:Pi = the current price of Common Stock iD1 = the expected dividend in Period 1ki = the required rate of return on Stock igi = the expected constant-growth rate of dividends for Stock iA. Identify the three factors that must be estimated for any valuation model, and explain whythese estimates are more difficult to derive for common stocks than for bonds.B. 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_forwardThe Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True Falsearrow_forwardThe additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stockarrow_forward
- Suppose you observe the following situation: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Bust 0.22 -0.12 -0.27 Normal 0.48 0.1 0.05 Boom 0.3 0.23 0.28 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?arrow_forwardWhich of the following statements is true about the constant dividend growth model? Group of answer choices 1. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to no change in the value of the stock 2. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock 3. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a increased value of the stockarrow_forwardWhich of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.arrow_forward
- The possible returns from investing in BestMax share are as follows: State of economy Probability of state of economy Return if state occurs Strong 0.26 96% Normal 0.51 12% Weak 0.23 -83% Based on the above information, calculate the following for BestMax shares: a. Standard deviation of return b. Coefficient of variation c. What does the coefficient of variation reveal about an investment's risk that the standard deviation does not? Explain. d. What is 'risk' in the context of financial decision making? Explain.arrow_forwardmultible choice, In applying the constant-growth dividend model, increasing the market capitalization rate will cause a stock’s intrinsic value to? why? decrease increase remain unchanged. decrease or increase, depending upon other factors.arrow_forwardOne stock valuation model holds that the value of a share of stock is a function of its ends will increase at an annual rate which will remain unchangedover time. This stock valuation model is known as the * approximate yield model. holding period return model. constant growth dividend valuation model. dividend reinvestment model.arrow_forward
- The constant growth DCF model used to evaluate the prices of common stocks isconceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities. True or False?arrow_forwardYou are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21arrow_forwardA stock that a growth rate of 0% must have a dividend yield that is equal to the required return Select one: True Falsearrow_forward
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