Question 1

Using the Gordon growth formula,if D1 is $1.00,ke is 10 percent or 0.10,and g is 5 percent or 0.05,then the current stock price is ________.

Accepted Answer

The Gordon growth formula is P = D1/(ke - g). 
Substituting values: 
P = 1/(0.10 - 0.05) = $20.

Question 2

Using the Gordon growth formula,if D1 is $2.00,ke is 12 percent or 0.12,and g is 10 percent or 0.10,then the current stock price is ________.

Accepted Answer

The Gordon growth formula is P = D1 / (ke - g). Substituting the given values: P = $2.00 / (0.12 - 0.10) = $2.00 / 0.02 = $100.

Question 3

What is the current price of a telecommunication company's stock if earnings per share are projected to be $1.50 per share and the industry's average PE ratio is $30?

Accepted Answer

The price of the stock can be calculated by multiplying the earnings per share (EPS) by the price-to-earnings (PE) ratio. Here, EPS is $1.50 and the PE ratio is 30, so the stock price is $1.50 * 30 = $45.

Question 4

You believe that a corporation's dividends will grow 5 percent on average into the foreseeable future.If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12 percent required return?

Accepted Answer

The answer of You believe that a corporation's dividends will...

Question 5

Using the Gordon growth model,a stock's price will increase if ________.

Accepted Answer

According to the Gordon growth model, a stock's price is directly proportional to the expected future dividends. Therefore, if the dividend growth rate increases, the future dividends are expected to be higher, which will result in a higher stock price. Conversely, if the growth rate of dividends falls, the stock price will decrease. The required rate of return on equity and expected sales price are not directly related to the Gordon growth model.

Question 6

A change in perceived risk of a stock changes ________.

Accepted Answer

A change in perceived risk of a stock changes the required rate of return, as investors will demand a higher rate of return to compensate for the increased risk. This could in turn affect the stock's price and dividend payout, but these changes are not directly caused by the change in perceived risk.

Question 7

In asset markets,an asset's price is ________.

Accepted Answer

In asset markets, an asset's price is set by the buyer willing to pay the highest price. This is also referred to as the "market clearing price," because it is the price at which the quantity of the asset demanded by buyers equals the quantity supplied by sellers.

Question 8

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Accepted Answer

The Gordon Growth Model assumes that dividends will continue to grow at a constant rate indefinitely. This assumption is necessary for the model to work, as it relies on the notion that future cash flows (dividends) can be estimated based on a constant growth rate. If dividends were to grow at an increasing, fast, or escalating rate, it would be more difficult to predict future cash flows and the accuracy of the model would be diminished.

Question 9

In the generalized dividend model,the current stock price is the sum of ________.

Accepted Answer

The generalized dividend model states that the current stock price is equal to the present value of the future dividend stream. This means that the value of all expected future dividend payments are discounted back to their present value to determine the current stock price. Option A is incorrect as the actual value of future dividends is unknown and cannot be used for valuation. Option C is incorrect as it is not relevant to the dividend model. Option D is incorrect as it refers to a future sales price which is not relevant to the dividend model.

Question 10

In the Gordon growth model,a decrease in the required rate of return on equity ________.

Accepted Answer

According to the Gordon growth model, as the required rate of return on equity decreases, the current stock price will increase. This is because a lower required rate of return means investors are willing to pay more for the stock, since they expect higher future dividends and capital gains. Therefore, a decrease in required rate of return will cause an increase in the current stock price.

Question 11

In the Gordon Growth Model,the growth rate is assumed to be ________ the required return on equity.

Accepted Answer

The Gordon Growth Model assumes that the growth rate of dividends is less than the required return on equity. This is because if the growth rate was greater than the required return, the value of the stock would theoretically become infinite. If the growth rate was equal to the required return, the stock price would be stable but there would be no room for capital appreciation. Therefore, the model assumes the growth rate is less than the required return on equity, which allows for a reasonable level of capital appreciation while still maintaining a stable stock price.

Question 12

The price earnings ratio (PE)is a measure of how much the market is willing to pay for $1 of ________ from a firm.

Accepted Answer

The price earnings ratio (PE) compares the price per share of a company's stock to its earnings per share. Therefore, it is a measure of how much the market is willing to pay for $1 of earnings from the firm.

Question 13

What rights does ownership interest give stockholders?

Accepted Answer

The answer of What rights does ownership interest give stockholders?...

Question 14

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Accepted Answer

The answer of A monetary expansion ________ stock prices due...

Question 15

What is the current price of a telecommunication company's stock if earnings per share are projected to be $2.00 per share and the industry's average PE ratio is $20?

Accepted Answer

The price of the stock can be calculated by multiplying the earnings per share (EPS) by the industry's average price-to-earnings (PE) ratio: $2.00 * 20 = $40.

Question 16

A stock's price will fall if there is ________.

Accepted Answer

An increase in the required rate of return (also known as the discount rate) will cause the present value of future cash flows to decrease, leading to a decrease in the stock's price. The other options are not likely to cause a decrease in the stock price as they either decrease perceived risk (A), increase future sales price (C), or indicate high current dividends (D) which could be viewed positively by investors.

Question 17

Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________.

Accepted Answer

Information helps the buyer to assess the risk associated with an asset, which is an important factor in determining its price. Information about liquidity, capital or policy may also be important, but mainly indirectly affect the risk of an asset.

Question 18

Explain the Gordon growth model of stock pricing.Explain how changes in each component affect the current stock price.On what assumptions is the model based?

Accepted Answer

The answer of Explain the Gordon growth model of stock...

Question 19

New information that might lead to a decrease in an asset's price might be ________.

Accepted Answer

An expected decrease in the level of future dividends would lead to a decrease in the asset’s price because the cash flows associated with the asset decrease. The other options would likely lead to an increase in the asset’s price.

Question 20

Describe the Price Earnings Valuation method for stocks.

Accepted Answer

The answer of Describe the Price Earnings Valuation method for...

Quiz 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis