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Q18. Given the following information, compute the implied dividend growth rate.
A) 18.0%.
B) 4.5%.
C) 12.0%.
Q19. If the return on equity for a firm is 15% and the retention rate is 40%, the firm’s sustainable growth rate is closest to:
A) 15%.
B) 6%.
C) 9%.
Q20. Which of the following statements concerning security valuation is least accurate?
A) The top-down approach to security valuation starts with an examination of the economy of each country.
B) The retention rate in the dividend discount model is one minus the growth rate.
C) A common stock with no growth in the dividend is valued like preferred stock.
Q21. All else equal, the price-to-earnings (P/E) ratio of a stable firm will increase if the:
A) dividend payout is decreased.
B) long-term growth rate is decreased.
C) ROE is increased.
Q22. Which of the following is NOT an assumption of the constant growth dividend discount model (DDM)?
A) Dividend payout is constant.
B) The growth rate of the firm is higher than the overall growth rate of the economy.
C) ROE is constant.
Q23. REM Corp.’s return on equity (ROE) is 19.5% and its dividend payout rate is 45%. What is the company’s implied dividend growth rate?
A) 10.73%.
B) 19.5%.
C) 8.78%.
Q24. In its latest annual report, a company reported the following:
|
Net income |
= $1,000,000 |
|
Total equity |
= $5,000,000 |
|
Total assets |
= $10,000,000 |
|
Dividend payout ratio |
= 40% |
Based on the sustainable growth model, the most likely forecast of the company’s future earnings growth rate is:
A) 12%.
B) 6%.
C) 8%.
Q25. Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, the firm’s expected dividend growth rate can be estimated by its:
A) price to earnings ratio.
B) risk premium.
C) sustainable growth rate.
Q18. Given the following information, compute the implied dividend growth rate.fficeffice" />
A) 18.0%.
B) 4.5%.
C) 12.0%.
Correct answer is A)
Retention ratio equals 1 – 0.40, or 0.60.
Return on equity equals (10.0%)(2.0)(1.5) = 30.0%.
Dividend growth rate equals (0.60)(30.0%) = 18.0%.
Q19. If the return on equity for a firm is 15% and the retention rate is 40%, the firm’s sustainable growth rate is closest to:
A) 15%.
B) 6%.
C) 9%.
Correct answer is B)
g = (RR)(ROE)
= (0.15)(0.40)
= 0.06 or 6%
Q20. Which of the following statements concerning security valuation is least accurate?
A) The top-down approach to security valuation starts with an examination of the economy of each country.
B) The retention rate in the dividend discount model is one minus the growth rate.
C) A common stock with no growth in the dividend is valued like preferred stock.
Correct answer is B)
The retention rate is one minus the dividend payout ratio.
Q21. All else equal, the price-to-earnings (P/E) ratio of a stable firm will increase if the:
A) dividend payout is decreased.
B) long-term growth rate is decreased.
C) ROE is increased.
Correct answer is C)
The increase in growth rate will increase the P/E ratio of a stable firm and growth rate can be calculated by the formula g = ROE * retention ratio. All else being equal an increase in ROE will therefore increase the P/E ratio. Note that decreasing the dividend payout ratio, increasing the required rate of return, and decreasing the long term growth rate will all serve to decrease the P/E ratio.
Q22. Which of the following is NOT an assumption of the constant growth dividend discount model (DDM)?
A) Dividend payout is constant.
B) The growth rate of the firm is higher than the overall growth rate of the economy.
C) ROE is constant.
Correct answer is B)
Other assumptions of the DDM are: dividends grow at a constant rate and the growth rate continues for an infinite period.
Q23. REM Corp.’s return on equity (ROE) is 19.5% and its dividend payout rate is 45%. What is the company’s implied dividend growth rate?
A) 10.73%.
B) 19.5%.
C) 8.78%.
Correct answer is A)
g = (ROE)(RR)
g = (19.5)(1 - 0.45)
g = (0.195)(0.55)
= 0.1073 or 10.73%
Q24. In its latest annual report, a company reported the following:
|
Net income |
= $1,000,000 |
|
Total equity |
= $5,000,000 |
|
Total assets |
= $10,000,000 |
|
Dividend payout ratio |
= 40% |
Based on the sustainable growth model, the most likely forecast of the company’s future earnings growth rate is:
A) 12%.
B) 6%.
C) 8%.
Correct answer is A)
g = (RR)(ROE)
RR = 1 ? dividend payout ratio = 1 ? 0.4 = 0.6
ROE = NI / Total Equity = 1,000,000 / 5,000,000 = 1 / 5 = 0.2
Note: This is the "simple" calculation of ROE. Since we are only given these inputs, these are what you should use. Also, if given beginning and ending equity balances, use the average in the denominator.
g = (0.6)(0.2) = 0.12 or 12%
Q25. Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, the firm’s expected dividend growth rate can be estimated by its:
A) price to earnings ratio.
B) risk premium.
C) sustainable growth rate.
Correct answer is C)
Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, then the firm’s expected dividend growth rate (g) can be defined as the firm’s earnings plowback or retention rate (RR) times the return on the equity (ROE) portion of new investment. RR is equal to 1 minus the dividend payout ratio, and ROE equals profit margin times total asset turnover times financial leverage. This growth rate is also called the sustainable growth rate.
thanks la
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