Question 1

Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P₄) can be calculated using D₅/(r - g) and P₀*(1 + g)⁴.

Accepted Answer

The formula mentioned is a variation of the Gordon Growth Model (also known as the Dividend Discount Model for a perpetuity), which is used to calculate the present value of a stock based on its future series of dividends that grow at a constant rate. The formula $\frac{D_0 \times (1 + g)}{r - g}$ is used to calculate the price of the stock at the end of a period (in this case, four years), where $D_0$ is the current dividend, $g$ is the growth rate of the dividend, and $r$ is the required rate of return.

Question 2

The total rate of return earned on a stock is comprised of the dividend yield and the capital gains yield.

Accepted Answer

The total rate of return on a stock is indeed comprised of two main components: the dividend yield (income received from dividends as a percentage of the stock's price) and the capital gains yield (the increase in the stock's price, also expressed as a percentage).

Question 3

The dividend growth model assumes that dividends increase at a constant rate forever.

Accepted Answer

The dividend growth model, specifically the Gordon Growth Model, assumes that dividends will grow at a constant rate indefinitely, which is used to value a stock by predicting future dividends and discounting them back to their present value.

Question 4

According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate.

Accepted Answer

In the constant growth model (also known as the Gordon Growth Model), the dividend yield is indeed calculated as the required rate of return minus the dividend growth rate. This model assumes dividends grow at a constant rate indefinitely.

Question 5

All else constant, a decrease in the dividend amount will increase the dividend yield of a stock.

Accepted Answer

Dividend yield is calculated as the annual dividends per share divided by the price per share. If the dividend amount decreases and the stock price remains constant, the dividend yield will decrease, not increase.

Question 6

Payment of dividends is a tax deductible business expense for a corporation.

Accepted Answer

Dividends paid to shareholders are not tax deductible for the corporation; they are paid out of the company's after-tax profits.

Question 7

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now, from the past and into the future.

Accepted Answer

The Gordon Growth Model (a version of the Dividend Discount Model) allows you to calculate the present value of a stock with dividends growing at a constant rate, using the most recent dividend, growth rate, and discount rate.

Question 8

All else constant, an increase in the dividend amount will increase the dividend yield of a stock.

Accepted Answer

Dividend yield is calculated as the annual dividend per share divided by the stock's price per share. If the dividend amount increases while the stock price remains constant, the dividend yield will increase.

Question 9

The total return on a share of stock = dividend yield + capital gains yield.

Accepted Answer

The total return on a share of stock is indeed the sum of the dividend yield (the annual dividend payment divided by the stock's price) and the capital gains yield (the increase in the stock's price), reflecting both income and growth components of the investment.

Question 10

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price into the future.

Accepted Answer

The information given allows you to calculate the current price of the stock using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), not just the price into the future.

Question 11

When the constant dividend growth model holds, g = capital gains yield.

Accepted Answer

In the constant dividend growth model, the growth rate of dividends (g) is equal to the capital gains yield, as both represent the rate at which the value of the investment is expected to grow over time.

Question 12

A decrease in the dividend growth rate will increase a stock's market value, all else the same.

Accepted Answer

A decrease in the dividend growth rate typically leads to a decrease in a stock's market value, as the stock's future cash flows are expected to grow at a slower rate, making it less attractive to investors.

Question 13

An increase in the required return on a stock will decrease its market value, all else the same.

Accepted Answer

An increase in the required return (discount rate) decreases the present value of future cash flows from the stock, thus lowering its market value.

Question 14

Dividends received by both individuals and corporations are fully taxable.

Accepted Answer

Dividends received by both individuals and corporations are subject to taxation.

Question 15

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Accepted Answer

Dividend yield is calculated as the annual dividends per share divided by the price per share. If the stock price decreases while the dividend remains constant, the dividend yield increases.

Question 16

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now.

Accepted Answer

The Gordon Growth Model allows for the calculation of the price of a stock at any point in time, not just now, by adjusting the formula to reflect the timing of the dividends.

Question 17

The dividend growth model can be used to compute a stock price at any point of time.

Accepted Answer

The dividend growth model calculates a stock's fair value based on its future dividend payments, which can be projected for any point in time, assuming the growth rate and required rate of return are known.

Question 18

If one uses the constant growth model to value stock, one assumes that P₁ = P₀ *(1 + g), P₂ = P₀ * (1 + g), etc.

Accepted Answer

The provided formula appears to be incorrectly formatted or contains typographical errors, making it difficult to interpret accurately. However, the constant growth model (also known as the Gordon Growth Model) for valuing stock typically assumes that the price of a stock is equal to the dividend per share for the next year divided by the discount rate minus the constant growth rate of the dividends (P = D1 / (r - g)). The formula provided does not clearly represent this principle.

Question 19

Dividends paid by a corporation can reduce the taxable income of the corporation.

Accepted Answer

Dividends paid by a corporation are not deductible from the corporation's taxable income; they are paid out of the after-tax profits.

Question 20

All else constant, an increase in the stock price will increase the dividend yield of a stock.

Accepted Answer

Dividend yield is calculated as the annual dividends per share divided by the price per share. If the stock price increases while the dividend remains constant, the dividend yield actually decreases.

Quiz 8: Stock Valuation

Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P₄) can be calculated using D₅/(r - g) and P₀*(1 + g)⁴.

The total rate of return earned on a stock is comprised of the dividend yield and the capital gains yield.

The dividend growth model assumes that dividends increase at a constant rate forever.

According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate.

All else constant, a decrease in the dividend amount will increase the dividend yield of a stock.

Payment of dividends is a tax deductible business expense for a corporation.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now, from the past and into the future.

All else constant, an increase in the dividend amount will increase the dividend yield of a stock.

The total return on a share of stock = dividend yield + capital gains yield.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price into the future.

When the constant dividend growth model holds, g = capital gains yield.

A decrease in the dividend growth rate will increase a stock's market value, all else the same.

An increase in the required return on a stock will decrease its market value, all else the same.

Dividends received by both individuals and corporations are fully taxable.

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now.

The dividend growth model can be used to compute a stock price at any point of time.

If one uses the constant growth model to value stock, one assumes that P₁ = P₀ (1 + g), P₂ = P₀ (1 + g), etc.

Dividends paid by a corporation can reduce the taxable income of the corporation.

All else constant, an increase in the stock price will increase the dividend yield of a stock.

Quiz 8: Stock Valuation

Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) can be calculated using D5/(r - g) and P0*(1 + g)4.

The total rate of return earned on a stock is comprised of the dividend yield and the capital gains yield.

The dividend growth model assumes that dividends increase at a constant rate forever.

According to the constant growth model, the dividend yield is equal to the required return minus the dividend growth rate.

All else constant, a decrease in the dividend amount will increase the dividend yield of a stock.

Payment of dividends is a tax deductible business expense for a corporation.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now, from the past and into the future.

All else constant, an increase in the dividend amount will increase the dividend yield of a stock.

The total return on a share of stock = dividend yield + capital gains yield.

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price into the future.

When the constant dividend growth model holds, g = capital gains yield.

A decrease in the dividend growth rate will increase a stock's market value, all else the same.

An increase in the required return on a stock will decrease its market value, all else the same.

Dividends received by both individuals and corporations are fully taxable.

All else constant, a decrease in the stock price will increase the dividend yield of a stock

Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are told Stable's most recent dividend paid, its dividend growth rate, and a discount rate, you can only calculate the price now.

The dividend growth model can be used to compute a stock price at any point of time.

If one uses the constant growth model to value stock, one assumes that P1 = P0 *(1 + g), P2 = P0 * (1 + g), etc.

Dividends paid by a corporation can reduce the taxable income of the corporation.

All else constant, an increase in the stock price will increase the dividend yield of a stock.

Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P₄) can be calculated using D₅/(r - g) and P₀*(1 + g)⁴.

If one uses the constant growth model to value stock, one assumes that P₁ = P₀ (1 + g), P₂ = P₀ (1 + g), etc.