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Equity Investments MCQ - Equity Investments Section 2

91 A security’s required rate of return is 12% and its beta is 1.5. The market risk premium is 6%. What is the risk-free rate?

12 = r + (1.5 * 6) r = 3.

92 ABC Corporation will pay a dividend of $1.25 per share next year. If the required rate of return is 11.32% per year and dividends are expected to grow at a constant rate of 4% per year, the intrinsic value of ABC Corporation stock is closest to:

Intrinsic value via Gordon growth model = 1.25 / (0.1132 - 0.04) = $17.08

93 In a Gordon growth model, what happens to the intrinsic value if dividend increases?

When dividend increases, numerator increases. If the payout ratio increases, retention rate decreases and value of g decreases. If g decreases, the denominator increases. As a result, the impact on value if dividend is increased cannot be determined with certainty.

94 Peter is considering the purchase of a common stock. The current annual dividend is EUR 3.5. This dividend is expected to grow at a rate of 5% annually. If the required return is 7%, the intrinsic value of the stock is closest to:

V = 3.5 (1.05) / (0.07 - 0.05) = EUR 184.

95 Jim gathers the following information about a stock:
Current price per share $54.00
Current annual dividend per share $2.50
Annual dividend growth rate for Years 1-4 12% Annual dividend growth rate for Years 5+6% Required rate of return 15% Based on DDM, the stock is most likely:

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Question:

A decrease in the dividend payout ratio will most likely decrease the intrinsic value when using a(n):

A. multiplier model.
B. asset-based valuation model.
C. present value model.

Correct answer: C

Explanation:

A decrease in the dividend payout ratio will decrease the cash expected to be distributed to shareholders. The Dividend discount model is the present value of the cash…

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