Question

Which two of the following five statements are correct? Select two alternatives: During periods of high growth, it is not unusual for firms to pay out 100% of their earings to shareholders in the form of dividends. We should use the general dividend discount model to value the stock of a firm with rapid or changing growth. The capital gain is the difference between the expected sale price and the purchase price of the stock. Estimating dividends, especially for the distant future, is difficult. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

Answer 1

Yes, Option 3 and 4 are correct

Capital gains=Expected sale price-Purchase price

Estimating dividends are difficult in the long run, because profits and dividend policy could change based on the future environment which is ver difficult to assess. If company forsees any expansion opportunities, they cut the dividends.

The other option are wrong because

During the high growth period, companies will not pay high levels of dividends because they need money forr the investments during this phase

General Dividend growth model is used for companies with a constant growth rate but now for changing growth rates

As per dividend model, the value depends on the expected dividend in next year divided by cost of capital minus growth rate

Value=(dividend1/(cost of capital-growth rate))