1. Which one of the following is a requirement of the two-stage dividend growth model?
A. both growth rates must be less than the discount rate
B. one of the two growth rates must exceed the discount rate
C. the first growth rate must exceed the second growth rate
D. the first growth rate must equal the discount rate
E. the second growth rate must be less than the discount rate
2. Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock?
A. irregular dividend
B. constant perpetual growth
C. constant dividend
D. two-stage dividend growth
E. perpetuity formula
3. Which one of the following statements concerning beta is correct?
A. The beta assigned to the overall market is zero.
B. A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3.
C. A stock with a beta of .5 has 50 percent more risk than the overall market.
D. Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models.
E. The higher the beta, the higher the discount rate used for the dividend discount models.
4. Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year. The company is slowly downsizing and is decreasing its dividend by 3 percent annually. What is the current value of this stock at a discount rate of 8 percent?
A. $18.86
B. $19.12
C. $19.78
D. $20.00
E. $20.57