# Chapter 7

1499 Words May 7th, 2012 6 Pages
1. Which of the following statements is CORRECT?a. The constant growth model takes into consideration the capitalgains investors expect to earn on a stock.STATEMENT A is true because the expected growth rate is also the expected capitalgains yield.b. Two firms with the same expected dividend and growth rates must alsohave the same stockprice.c. It is appropriate to use the constant growth model to estimate a stock 'svalue even if itsgrowth rate is never expected to become constant.d. If a stock has a required rate of return rs = 12%, and if its dividend isexpected to grow at aconstant rate of 5%, this implies that the stock’s dividend yield is also 5%.e. The price of a stock is the present value of all expected future dividends,discounted …show more content…
? ? ?? TV3 = P3 = D4/(rs − g4). Find using Estimated rs.
?Total CFs ? ? ?PVs of CFs when discounted at Estimated rs ? ? ?Calculated Price = P0 = Sum of PVs = \$0.00A positive number will be here when dividends are estimated. The Calculated Pricewill equal the Actual Market Price once the correct rs has been found.Sally told you that the growth rates in the template were just put in as a trial, andthat you mustreplace them with the analysts ' forecasted rates to get the correct forecasteddividends and thenthe estimated TV. She also notes that the estimated value for rs, at the top of thetemplate, is also just a guess, and you must replace it with a value that will cause the CalculatedPrice shown atthe bottom to equal the Actual Market Price. She suggests that, after you have putin the correctdividends, you can manually calculate the price, using a series of guesses as to theEstimated rs. The value of rs that causes the calculated price to equal the actual price is thecorrect one. Shenotes, though, that this trial-and-error process would be quite tedious, and that thecorrect