The following questions are from past CFA examinations.
a. The constant-growth DDM will not produce a finite value if the dividend growth rate is:
i. Above its historical average.
ii. Above the market capitalization rate.
iii. Below its historical average.
iv. Below the market capitalization rate.
b. According to the constant-growth DDM, a fall in the market capitalization rate will cause a stock’s intrinsic value to:
i. Decrease.
ii. Increase.
iii. Remain unchanged.
iv. Decrease or increase, depending on other factors.
c. You plan to buy a common stock and hold it for one year. You expect to receive both $1.50 in dividends and $26 from the sale of stock at the end of the year. If you wanted to earn a 15% return, what is the maximum price you would pay for the stock today?
d. In the dividend discount model, a factor not affecting the discount rate, k, is the:
i. Real risk-free rate.
ii. Risk premium for stocks.
iii. Return on assets.
iv. Expected inflation rate.
e. Ashare of stock is expected to pay a dividend of $1.00 one year from now and grow at 5% thereafter. In the context of a dividend discount model, the stock is correctly priced today at $10. According to the single-stage, constant-growth DDM, if the required return is 15%, what should be the value of the stock two years from now?
f. Astock is not expected to pay dividends until three years from now. The dividend is then expected to be $2.00 per share, the dividend payout ratio is expected to be 40%, and the return on equity is expected to be 15%. If the required rate of return is 12%, what should be the value of the stock today?
g. The constant-growth DDM would typically be most appropriate in valuing the stock of a:
i. New venture expected to retain all earnings for several years.
ii. Rapidly growing company.
iii. Moderate-growth, “mature” company.
iv. Company with valuable assets not yet generating profits.
h. Astock has a required return of 15%, a constant-growth rate of 10%, and a dividend payout ratio of 45%. The stock’s price–earnings ratio should be:
i. 3.
ii. 4.5.
iii. 9.
iv. 11.