Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 8, Problem 12CRCT
Two-Stage Dividend Growth Model [LO1] One of the assumptions of the two-stage growth model is that the dividends drop immediately from the high growth rate to the perpetual growth rate. What do you think about this assumption? What happens if this assumption is violated?
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Do you think we can use the constant growth method to predict non constant growth price?
What will happen to the present value if the growth rate exceeds the discount rate?
the present value will be infinite
the present value will be zero
the present value will be unknown
No answer text provided.
What is the primary limitation of the constant dividend increment model?
Dividends will continue to grow at a constant dollar amount indefinitely.
The required return must be greater than the dividend growth rate implied by the constant amount.
Dividend cannot decrease over time.
Chapter 8 Solutions
Fundamentals of Corporate Finance
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Does the value of a share of stock depend on how...Ch. 8.1 - What is the value of a share of stock when the...Ch. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.2 - Why is preferred stock called preferred?Ch. 8.3 - Prob. 8.3ACQCh. 8.3 - Prob. 8.3BCQCh. 8.3 - How does NASDAQ differ from the NYSE?Ch. 8 - A stock is selling for 11.90 a share given a...
Ch. 8 - An 8 percent preferred stock sells for 54 a share....Ch. 8 - Prob. 8.3CTFCh. 8 - Stock Valuation [LO1] Why does the value of a...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Dividend Growth Model [LO1] Under what two...Ch. 8 - Common versus Preferred Stock [LO1] Suppose a...Ch. 8 - Prob. 6CRCTCh. 8 - Growth Rate [LO1] In the context of the dividend...Ch. 8 - Prob. 8CRCTCh. 8 - Prob. 9CRCTCh. 8 - Prob. 10CRCTCh. 8 - Prob. 11CRCTCh. 8 - Two-Stage Dividend Growth Model [LO1] One of the...Ch. 8 - Prob. 13CRCTCh. 8 - Price Ratio Valuation [LO2] What are the...Ch. 8 - Stock Values [LO1] The JacksonTimberlake Wardrobe...Ch. 8 - Stock Values [LO1] The next dividend payment by...Ch. 8 - Stock Values [LO1] For the company in the previous...Ch. 8 - Stock Values [LO1] Caan Corporation will pay a...Ch. 8 - Stock Valuation [LO1] Tell Me Why Co. is expected...Ch. 8 - Stock Valuation [LO1] Suppose you know that a...Ch. 8 - Stock Valuation [LO1] Estes Park Corp. pays a...Ch. 8 - Valuing Preferred Stock [LO1] Moraine, Inc., has...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Stock Valuation and PS [LO2] TwitterMe, Inc., is a...Ch. 8 - Stock Valuation [LO1] Bayou Okra Farms just paid a...Ch. 8 - Prob. 15QPCh. 8 - Nonconstant Dividends [LO1] Maloney, Inc., has an...Ch. 8 - Nonconstant Dividends [LO1] Lohn Corporation is...Ch. 8 - Supernormal Growth [LO1] Synovec Co. is growing...Ch. 8 - Prob. 19QPCh. 8 - Prob. 20QPCh. 8 - Prob. 21QPCh. 8 - Valuing Preferred Stock [LO1] E-Eyes.com just...Ch. 8 - Prob. 23QPCh. 8 - Two-Stage Dividend Growth Model [LO1] A7X Corp....Ch. 8 - Two-Stage Dividend Growth Model [LO1] Navel County...Ch. 8 - Stock Valuation and PE [LO2] Summers Corp....Ch. 8 - Stock Valuation and PE [LO2] You have found the...Ch. 8 - Stock Valuation and PE [LO2] In the previous...Ch. 8 - Stock Valuation and PE [LO2] YGTB, Inc., currently...Ch. 8 - PE and Terminal Stock Price [LO2] In practice, a...Ch. 8 - Stock Valuation and PE [LO2] Fly Away, Inc., has...Ch. 8 - Prob. 32QPCh. 8 - Stock Valuation [LO1] Most corporations pay...Ch. 8 - Nonconstant Growth [LO1] Storico Co. just paid a...Ch. 8 - Nonconstant Growth [LO1] This ones a little...Ch. 8 - Constant Dividend Growth Model [LO1] Assume a...Ch. 8 - Two-Stage Dividend Growth [LO1] Regarding the...Ch. 8 - Prob. 38QPCh. 8 - Prob. 1MCh. 8 - Prob. 2MCh. 8 - What is the industry average priceearnings ratio?...Ch. 8 - Prob. 4MCh. 8 - Assume the companys growth rate slows to the...Ch. 8 - Prob. 6M
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- which one is correct please confirm? QUESTION 25 The constant growth valuation model approach to calculating the cost of equity assumes that ____. a. earnings, dividends, and stock price will grow at a constant rate b. the growth rate is greater than or equal to ke c. earnings and dividends grow at a constant rate, but stock price growth is indeterminate d. dividends are constantarrow_forwardInfinite growth is a problem with the dividend discount model because: Seleccione una: a. Dividend growth rates eventually become very small b. The statement is incorrect as infinite growth is not a problem with the dividend discount model because at reasonably high discount rates, such as 12 percent, dividends received in the distant future are worth very little today c. The expected stream of dividends is infinite d. At reasonably high discount rates, such as 12 percent, dividends received in the distant future (40 or 50 years from now) are worth very little todayarrow_forwardch one of the following is seen as a limitation of the Dividend Discount Model (DDM) is: ot relevant for firms growing at a constant and perpetual rate. e required rate of return (k) converges with the growth rate (g), the value of the share goes to infinity. required rate of return (k) exceeds the growth rate (g), the value of the share cannot be determined. Dividend Discount Model (DDM) has no limitations. (Ctrl) -arrow_forward
- which one is correct please confirm? QUESTION 39 The constant growth valuation model approach to calculating the cost of equity assumes that ____. a. dividends are constant b. earnings and dividends grow at a constant rate, but stock price growth is indeterminate c. earnings, dividends, and stock price will grow at a constant rate d. the growth rate is greater than or equal to kearrow_forwardThe constant growth model is useful if?arrow_forward[15] True or False (Provide explanation). Dividend discount model requires the growth rate to be greater than the required return; else, the stock is worthless.arrow_forward
- QUESTION 6 Which of the following statements is true? O A. Companies look for investments with payback periods that are larger than their maximum accepted payback period O B. An investment with a profatibility index less than 1 is profitable and desirable O C.A projected is accepted if the IRR is less than the cost of capital O D. None of the above are truearrow_forwardstock? 7.11 Stock Valuation Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits. LO 2 LO 1 7.12 Constant Dividend Growth Model In the constant dividend growtharrow_forwardThere are two basic assumptions concerning the growth rate that underlie the dividend growth model. Identify one of these assumptions and explain why the assumption is logical. (Answer the question correctly and in-depth.)arrow_forward
- QUESTION 6 Which of the following statements is true? O A. Companies look for investments with payback periods that are larger than their maximum accepted payback period O B. An investment with a profatibility index less than 1 is profitable and desirable OC.A projected is accepted if the IRR is less than the cost of capital O D. None of the above are truearrow_forwardwhich one is correct please confirm? QUESTION 18 Which of the following is not an alternative dividend policy? a. Stable dollar b. Constant earnings c. Passive residual d. Constant payoutarrow_forwardCould the dividend growth approach be appliedif the growth rate were not constant? How?arrow_forward
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