Question

1) A company recently paid out a $4 per share dividend on their stock. Dividends are projected to grow at a constant rate of 5% into the future, and the required return on investment is 8%. After one year, the holding period return to an investor who buys the stock right now will be:

A. 5%

B. 3%

C. 8%

D. 13%

2) A company recently paid out a $2 per share dividend on their stock. Dividends are projected to grow at a constant rate of 4% into the future, and the required return on investment is 6%. After one year, the holding period return to an investor who buys the stock right now will be:

A. 2%

B. 4%

C. 6%

D. 10%

3) A company recently paid out a $2 per share dividend on their stock. Dividends are projected to grow at a constant rate of 3% into the future, and the required return on investment is 10%. The current price of a share of stock is:

A. $ 28.57

B. $ 2.00

C. $ 20.00

D. $ 29.43

4) A firm with return on equity (ROE) much greater than its cost of capital:

A. is likely to have a relatively high P/E

B. should pay out earnings to investors as dividends rather than retain earnings for growth

C. will generally have a lower price per share than other companies in the market

D. is implementing negative NPV projects within the firm

5) A company recently paid out a $4 per share dividend on their stock. Dividends are projected to grow at a constant rate of 5% into the future, and the required return on investment is 8%. The percentage change in the stock price from one period to the next is likely to be:

A. 5%

B. 3%

C. 8%

D. 13%

6) The constant growth model for valuing equity can NOT be used if:

A. a company is not paying any dividends, and is not expected to in the near future.

B. a company’s dividend growth rate is greater than its expected return

C. both (A) and (B)

D. none of the above

Answer 1

1)

Required rate of return on stocks is divided into dividend yield and capital gains yield. Capital gains yield also called growth rate. Under normal market conditions, holding period yield will equal to required rate of return.

Hence, correct option is C. 8%