Question

16. b. All of the following are interchangeable terms used in a Dividend Discount Model except for: discount rate coupon rate required rate of return cost of equity capital 17. The dividend valuation model that is most appropriate for a young company that pays small dividends now but is expected to increase dividends in a few years is the: zero-growth model. constant growth model. expansion growth model. multiple growth model. b. c. d. 18. What is the estimated value of a stock with a required rate of return of 12%, a projected constant growth rate of dividends of 7% and expected dividend next year of $2.502 $60 $15 $150 b. $50

Answer 1

16 Ans : b - Coupon rate Coupon rates is nothing but rate of interest paid by bond issuers on the bonds face value. Where as discount rate or required rate of return or cost of equity capital is rate we used to calculate current price of stock under dividend discount model. Current price of stock under dividend discount model = DPS1 / (RR - g) 17 Ans :d - Multiple growth model Multi-stage dividend discount model is a technique used to calculate current value of a stock by identifying different growth phases of a stock. 18 Reqired rate of return, RR = 12% Growth rate, g = 7% Expected dividen in next year, D1 = $2.50 Current price of stock, PO = D1 / (RR - g) = $2.50 / (12% - 7%) = $2.50 / 5% = $50 Ans : $50 Per share