EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 11, Problem 4PS
Summary Introduction
To determine:
Whether the scenario that steady industry is consistent with payment of dividend make the purchase of the stock more attractive to the investor.
Introduction:
Stock stands to be the general term which is taken into consideration for describing the company's ownership certificates. On the other hand share refers to the company's stock certificate. When a share of a particular company is held by an investor, he is known as a shareholder.
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Answer this question based on the dividend growth
model. If you expect the required rate of return to
increase across the board on all equity securities, then
you should also expect:
A decrease in all stock values.
All stock values to remain constant.
An increase in all stock values.
An increase or a decrease in all stock values.
None of the above.
Which of the following statements best describes how a change in a firm’s stock price would affect a stock’s capital gains yield?
The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm’s expected future stock price.
The capital gains yield on a stock that the investor already owns has a direct relationship with the firm’s expected future stock price.
Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.25 at the end of the year. Its dividend is expected to grow at a constant rate of 9.00% per year. If Walter’s stock currently trades for $26.00 per share, what is the expected rate of return?
Which of the following statements will always hold true?
The constant growth valuation formula is not appropriate to use for zero growth stocks.
It will never be appropriate for a rapidly growing startup company that pays no dividends at present—but is expected to…
Evaluate the following statement:
When a firm pays dividend, its stock price decreases in the market. Therefore, it is always better to buy a stock on the date of dividend payment.
Chapter 11 Solutions
EBK INVESTMENTS
Ch. 11 - Prob. 1PSCh. 11 - Prob. 2PSCh. 11 - Prob. 3PSCh. 11 - Prob. 4PSCh. 11 - Prob. 5PSCh. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Prob. 9PSCh. 11 - Prob. 10PS
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- Assuming 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) If after changing the dividend policy to a 70% payout, Chatterbox grows at a 3% rate, what would be the implied ACTUAL return on equity and stock price? Does the stock price rise or fall? Why?arrow_forwardDo you think the stock price increase is related to Nike’s share repurchase plan?arrow_forwardThe constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: D1 PO (rs g) Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital gains yield? The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price. The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm's expected future stock price. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.85 at the end of the year. Its dividend is expected to grow at a constant rate of 6.00% per year. If Walter's stock currently trades for $26.00 per share, what is the expected rate of return? 6.10% 6.77% 16.96% 13.36% Which of the following statements will always hold true? The constant growth valuation formula…arrow_forward
- How 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_forwardThe constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: Po = D₁ (Is - g) Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital gains yield? The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm's expected future stock price. The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.45 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter's stock currently trades for $29.00 per share, what is the expected rate of return? 713.36% 657.93% 1,104.83% 14.95% Which of the following conditions must hold true for the constant growth valuation…arrow_forward(7.6) The return on any stock traded in a financial market is composed of two parts. First, the return from the stock is the part of the return that shareholders in the market predict or expect. The second part of the return on the stock is the part. This is the portion that comes from revealed within the year. or or (7.7) The dividend growth model specifies that share price (Po) is given by the following: Po= RE = Only is not directly observable in the share price formula. Disadvantages of this approach to computing the cost of equity capital are: (1) the key underlying assumption is that the dividend grows at a ; (2) the estimated cost of equity is very sensitive to the and (3) the approach does not explicitly considerarrow_forward
- According to the Gordon dividend model, which of the following variables would not affect a stock's price? the firm's expected growth rate in dividends the number of shares outstanding the shareholder's required return next year's expected dividendarrow_forwardWhich of the following will increase the price of a stock? Group of answer choices: A. Decrease in the required rate of return B. Decrease in the dividend growth rate C. Delay in the payment of dividends D. Decrease in earnings growtharrow_forwardBased on the dividend growth model. If you exepect the market rate of return to inclease across the board on all equity securities, the you should also expect, what?arrow_forward
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