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Reading 56: An Introduction to Security Valuation LOSg习题精

LOS g: Describe a process for developing estimated inputs to be used in the DDM, including the required rate of return and expected growth rate of dividends.

Which of the following does NOT directly affect a company’s required return on equity?

A)
Return on assets.
B)
The company’s beta.
C)
Expected market return.



The formula for the required return is ke = risk free rate + beta × (market rate – risk free rate).

Regarding a standard dividend discount model (DDM) which of the following factors is least likely to affect the required rate of return on the investment?

A)

ROA.

B)

Expected inflation rate.

C)

Risk-free rate of return.




The CAPM formula for Ke = Rf + Beta × (Rm ? Rf), where Rf is the (nominal) risk-free rate of return and Rm is the market rate of return. The (nominal) risk-free rate = [(1 + real risk-free rate) × (1 + inflation rate)] ? 1.

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 stock’s dividend growth rate is a function of each of the following EXCEPT:

A)

profit margin.

B)

P/E ratio.

C)

total asset turnover.




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.

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A company’s growth rate in dividends and earnings can be estimated as the:

A)
product of the retention ratio and the return on equity.
B)
difference between the retention ratio and the return on equity.
C)
product of the return on equity and the dividend payout ratio.



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 investments. This growth rate is also called the sustainable growth rate.

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The required rate of return on equity used as an input to the dividend discount model is influenced by each of the following factors EXCEPT:

A)

the stock's dividend payout ratio.

B)

the stock's appropriate risk premium.

C)

the expected inflation rate.




A stock’s required rate of return is equal to the nominal risk-free rate plus a risk premium. The nominal risk-free rate is approximately equal the real risk-free rate plus expected inflation.

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The capital asset pricing model can be used to estimate which of the following inputs to the dividend discount model?

A)

The expected inflation rate.

B)
The required return on equity.
C)

The expected growth rate in dividends.




The capital asset pricing model is a rate of return model that can be used to estimate a stock’s required rate of return, given the nominal risk-free rate, the market risk premium, and the stock’s beta: k = Rnominal risk free rate + (beta)(Rmarket - Rnominal risk free rate).

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