Reading 41: Discounted Dividend Valuation- LOS n(part1)～

required, produced, increase, decrease, discount

LOS n, (Part 1): Explain how to estimate a required return based on any DDM.

Q1. If we increase the required rate of return used in a dividend discount model, the estimate of value produced by the model will:

A) decrease.

B) increase.

C) remain the same.

Q2. If we know the forecast growth rates for a firm’s dividends and the current dividends and current value, we can determine the:

A) net margin of the firm.

B) required rate of return.

C) sustainable growth rate.

Q3. Which of the following is least likely a valid approach to determining the appropriate discount rate for a firm’s dividends?

A) Free cash flow to firm (FCFF).

B) Capital asset pricing model (CAPM).

C) Asset pricing theory (APT).

Q4. If the risk-free rate is 6%, the equity premium of the chosen index is 4%, and the asset’s beta is 0.8, what is the discount rate to be used in applying the dividend discount model?

A) 7.80%.

B) 10.80%.

C) 9.20%.

Q5. In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset’s beta is used to determine the amount of:

A) the expected return in addition to the return required by the risk of the position.

B) risk-free rate applicable to the time period of the investment.

C) equity premium.

Q6. Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the dividend discount model can be used to calculate the required return for a stock, though only if the growth rate remains constant. Hatchett maintains that while such models are useful for calculating the value of a stock, they should not be used to calculate required returns. Who is CORRECT?

Strong Hatchett

A) Correct Incorrect

B) Incorrect Incorrect

C) Incorrect Correct

Q7. Which of the following groups of statistics provides enough data to calculate an implied return for a stock using the two-stage DDM?

A) Short-term growth rate, long-term growth rate, stock price, trailing 12-month profits.

B) Yield, stock price, historical dividend-growth rate, historical profit-growth rate.

C) P/E ratio, trailing 12-month profits, short-term PEG ratio, long-term PEG ratio, yield.