Constant growth rate in dividends

Question

Question 1: Which of the following contributes to high P/E ratios:

• High dividend payout ratios
• High rate of earnings growth
• Periods of high inflation
• High debt ratios

Question 2: A company that wants to maintain both a constant growth rate in dividends and a constant payout ratio will have to:

• grow earnings faster than dividends.
• increase assets at the same rate as dividends.
• grow earnings at the same rate as dividends.
• increase stockholders' equity at the same rate as dividends.

Question 3: There is no assurance that the actual rate of return on an asset will be similar to the projected rate of return.

• True
• False

Question 4: The constant-growth dividend valuation model is best suited for use with:

• stocks of new or emerging companies.
• small-cap stocks within growing industries.
• the stocks of mature, dividend-paying companies.
• the stocks of cyclical companies.

Question 5: There is no assurance that the actual rate of return on an asset will be similar to the projected rate of return.

• True
• False

Question 6: Most stocks trade at five to seven times their book values.

• True
• False

Question 7: In the price/earnings approach to stock valuation,

• historical stock prices are utilized.
• forecasted EPS are typically used.
• the P/E ratio is computed by multiplying the stock price by the earnings per share.
• the market P/E ratio, adjusted by beta, is used to value individual stocks.

Question 8: GLOO stock's P/E ratio is 45 at a time when the market's P/E ratio is 15. GLOO's realtive P/E ratio is:

• 30.
• -30.
• 3.
• .33.

Question 9: 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

• I and III only
• II and IV only
• I, II and IV only
• I, II and III only

Question 10: Which of the following will most directly influence a company's market value?

• The state of the economy.
• The book value of its assets.
• The use of financial leverage.
• Its future cash flows.

Question 11: The intrinsic value of a stock provides a purchase price for the stock:

• that is reasonable given the associated level of risk.
• which will assuredly yield the anticipated capital gain.
• which will guarantee the expected rate of return.
• that is always below the market value but yet yields the expected rate of return.

Question 12: A stock's internal rate of return (IRR) is the discount rate that cause the present value of future dividends to equal the price of the stock.

• True
• False

Question 13: If net income rises, but the number of shares outstanding remains the same, EPS will rise.

• True
• False

Question 14: The common stock of Jennifer's Furniture Outlet is currently selling at $32.60 a share. The company adheres to a 60% dividend payout ratio and has a P/E ratio of 19. There are 21,000 shares of stock outstanding. What is the amount of the annual net income for the firm?

• $21,619
• $36,032
• $48,327
• $60,053

Question 15: Which of the following characteristics appeal to so-called value investors?

I. high P/E ratios
II. low debt to equity ratios
III. high cash flow relative to price
IV. high book value relative to market price

• I and II only
• I and III only
• I, II and IV only
• II, III and IV only

Question 16: The dividend valuation model (DVM) is very sensitive to the growth rate (g) being used, because it affects both the model's numerator and its denominator.

• True
• False

Question 17: The key to the future behavior of a company lies in the sales growth and the net profit margin.

• True
• False

Question 18: Which one of the following is a correct equation to calculate earnings per share?

• (ROA)(book value per share)
• (profit margin)(total asset turnover)(equity multiplier)(book value per share)
• (profit margin)(equity multiplier)(book value per share)
• (profit margin)(book value per share)

Question 19: The price of a stock with a low relative P/E will tend to be more volatile than the price of a stock with a high relative P/E.

• True
• False

Question 20: Stephanie is an investor who believes that the real key to a company's future stock price lies in its future earnings. When investing in a company, she carefully studies its future earnings potential, and sells a company's stock at the first sign of any trouble. This information indicates that Della would correctly be classified as:

• a growth investor.
• a value investor.
• a buy-and-hold investor.
• an index investor.

Question 21: Newton, Inc. just paid an annual dividend of $0.95 . Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. What is the capitalization rate on this stock?

• 8.23%
• 12.2%
• 12.6%
• 13.9%

Question 22: Whisper numbers are:

• officially published forecast numbers provided by company management.
• the official released estimates prepared by financial analysts.
• generally less accurate than the released estimates by analysts.
• generally higher than the released analysts' forecasts.

Question 23: The rate of dividend growth can be estimated by multiplying the return on equity rate by the dividend payout ratio.

• True
• False

Question 24: The constant-growth dividend valuation model is best suited for use with:

• stocks of new or emerging companies.
• small-cap stocks within growing industries.
• the stocks of mature, dividend-paying companies.
• the stocks of cyclical companies.

Question 25: 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:

• approximate yield model.
• holding period return model.
• dividend reinvestment model.
• constant growth dividend valuation model.

Question 26: The rate of growth can exceed the required return during the variable-growth period without invalidating the variable growth dividend valuation model.

• True
• False

Question 27: A stock's internal rate of return (IRR) is the discount rate that cause the present value of future dividends to equal the price of the stock.

• True
• False

Question 28: 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

• I and III only
• II and IV only
• I, II and IV only
• I, II and III only

Question 29: Which of the following characteristics appeal to so-called value investors?

I. high P/E ratios
II. low debt to equity ratios
III. high cash flow relative to price
IV. high book value relative to market price

• I and II only
• I and III only
• I, II and IV only
• II, III and IV only

Question 30: 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?

• $12.50
• $18.88
• $20.83
• $25.00