1.If the expected return on the equity market is 10 percent, the risk-free rate is 3 percent, and an asset’s beta is 0.6, what is the appropriate equity risk premium for the asset in applying the Gordon growth model?

A)   4.20%.

B)   6.40%.

C)   7.80%.

D)   9.00%.

2.A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5 percent indefinitely. If current value of the firm’s shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?

A)   7.86%.

B)   6.50%.

C)   8.00%.

D)   8.25%.

3.Recent surveys of analysts report long-term earnings growth estimates as 5.5 percent and a forecasted dividend yield of 2.0 percent on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8 percent. According to the Gordon growth model, what is the equity risk premium?

A)   2.7%.

B)   0.4%.

C)   7.5%.

D)   12.3%.

4.Currently the market index stands at 1,190.45. Firms in the index are expected to pay cumulative dividends of 35.71 over the coming year. The consensus 5-year earnings growth forecast for these firms is expected to increase to 6.2 percent up from last year’s forecast of 4.5 percent. The long-term government bond is yielding 5.0 percent. According to the Gordon growth model, what is the equity risk premium?

A)   2.5%.

B)   9.2%.

C)   1.2%.

D)   4.2%.

5.Given an equity risk premium of 3.5 percent, a forecasted dividend yield of 2.5 percent on the market index and a U.S. government bond yield of 4.5 percent, what is the consensus long-term earnings growth estimate?

A)   5.5%.

B)   1.0%.

C)   10.5%.

D)   8.0%.

答案和详解如下：

1.If the expected return on the equity market is 10 percent, the risk-free rate is 3 percent, and an asset’s beta is 0.6, what is the appropriate equity risk premium for the asset in applying the Gordon growth model?

A)   4.20%.

B)   6.40%.

C)   7.80%.

D)   9.00%.

The correct answer was A)

The asset’s equity risk premium is equal to it’s beta times the difference between the expected return on the equity market and the risk-free rate. Equity Risk Premium = 0.6 (0.10 – 0.03) = 0.042 or 4.2%.

2.A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5 percent indefinitely. If current value of the firm’s shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?

A)   7.86%.

B)   6.50%.

C)   8.00%.

D)   8.25%.

The correct answer was C)

The Gordon DDM uses the dividend for the period (t + 1) which would be $1.05.
$35 = $1.05 / (required return – 0.05)
Required return = 0.08 or 8.00%

3.Recent surveys of analysts report long-term earnings growth estimates as 5.5 percent and a forecasted dividend yield of 2.0 percent on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8 percent. According to the Gordon growth model, what is the equity risk premium?

A)   2.7%.

B)   0.4%.

C)   7.5%.

D)   12.3%.

The correct answer was A)

Equity risk premium = 2.0% + 5.5% – 4.8% = 2.7%

4.Currently the market index stands at 1,190.45. Firms in the index are expected to pay cumulative dividends of 35.71 over the coming year. The consensus 5-year earnings growth forecast for these firms is expected to increase to 6.2 percent up from last year’s forecast of 4.5 percent. The long-term government bond is yielding 5.0 percent. According to the Gordon growth model, what is the equity risk premium?

A)   2.5%.

B)   9.2%.

C)   1.2%.

D)   4.2%.

The correct answer was D)

Equity risk premium = (35.71/1,190.45) + (6.2%) – 5.0% = 4.2%

5.Given an equity risk premium of 3.5 percent, a forecasted dividend yield of 2.5 percent on the market index and a U.S. government bond yield of 4.5 percent, what is the consensus long-term earnings growth estimate?

A)   5.5%.

B)   1.0%.

C)   10.5%.

D)   8.0%.

The correct answer was A)

Equity risk premium = forecasted dividend yield + consensus long term earnings growth rate – long-term government bond yield.

Therefore,
Consensus long term earnings growth rate =
Equity risk premium - forecasted dividend yield + long-term government bond yield
Consensus long term earnings growth rate = 3.5% - 2.5% + 4.5% = 5.5%