ESSENTIALS OF CORPORATE FINANCE
17th Edition
ISBN: 9781260665857
Author: Ross
Publisher: MCG CUSTOM
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Chapter 7, Problem 4CTCR
LO1 7.4. PRINTED BY: V.SwathiPpfeya@spi-global.com. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher’s prior permission Violators will be prosecuted.
Dividend Growth Model. Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions.
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Q4:4
Discuss the Dividend Discount Model in stock valuation from the following aspects
(1) Explain the underlying assumptions of DDM valuation model . <
(2) Identify the factors that must be estimated when value the stock with this model.
(3) Explain the problems in using dividend valuation model to value the companies that are quite small
and are growing rapidly.
Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following:
Note: 1 Retention ratio = 1 – Dividend payout ratio
a)What is the difference between the required return on equity and actual return on equity? Can they be equal? Which one would be used to compute the stock price?
• Choose a publicly traded company.
• Note: Be sure to choose a company that no other classmate has chosen.
• Determine its beta from a published source.
• Hint: Use Yahoo!Finance or NASDAQ to find the company's beta.
▪ Find the company's financial information by putting the company's name in the search bar.
. Calculate the company's cost of equity using the CAPM formula and the short-term risk-free rate assumptions.
▪ Use 8.5 percent as the market risk premium.
▪ Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury's
Resource Center to look up current 90-day (3-month) Treasury Yield Curve Rates.
▪ Provide your calculations in a table in your post.
▪ How Do I Insert a Table Using the Rich Content Editor? B
• Calculate the company's cost of equity using the CAPM formula and the long-term risk-free rate assumptions.
▪ Use 7.0 percent as the market risk premium
▪
Use the current 20-year yield on U.S.…
Chapter 7 Solutions
ESSENTIALS OF CORPORATE FINANCE
Ch. 7.1 - What are the relevant cash flows for valuing a...Ch. 7.1 - Does the value of a share of stock depend on how...Ch. 7.1 - What is the value of a share of stock when the...Ch. 7.1 - What is a target price on a stock? How is it...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Why is preferred stock called preferred?Ch. 7.3 - Prob. 7.3ACQCh. 7.3 - Prob. 7.3BCQCh. 7.3 - Prob. 7.3CCQ
Ch. 7.3 - Prob. 7.3DCQCh. 7 - Section 7.1What is the total return for a stock...Ch. 7 - Prob. 7.2CCh. 7 - LO1 7.1.Stock Valuation. Why does the value of a...Ch. 7 - LO1 7.2.Stock Valuation. A substantial percentage...Ch. 7 - Dividend Policy. Referring to the previous...Ch. 7 - LO1 7.4.PRINTED BY: V.SwathiPpfeya@spi-global.com....Ch. 7 - LO1 7.5.Common versus Preferred Stock. Suppose a...Ch. 7 - Prob. 6CTCRCh. 7 - Prob. 7CTCRCh. 7 - LO1 7.8.Dividends and Earnings. Is it possible for...Ch. 7 - Prob. 9CTCRCh. 7 - Prob. 10CTCRCh. 7 - Prob. 11CTCRCh. 7 - Prob. 12CTCRCh. 7 - Prob. 13CTCRCh. 7 - Prob. 14CTCRCh. 7 - Stock Values. Gilmore, Inc., just paid a dividend...Ch. 7 - Stock Values. The next dividend payment by Dizzle,...Ch. 7 - Prob. 3QPCh. 7 - Stock Values. Take Time Corporation will pay a...Ch. 7 - Stock Valuation. Mitchell, Inc., is expected to...Ch. 7 - Stock Valuation. Suppose you know that a companys...Ch. 7 - Stock Valuation. Burkhardt Corp. pays a constant...Ch. 7 - Valuing Preferred Stock. Smiling Elephant, Inc.,...Ch. 7 - Prob. 9QPCh. 7 - Growth Rates. The stock price of Baskett Co. is 73...Ch. 7 - Valuing Preferred Stock. E-Eyes.com has a new...Ch. 7 - Stock Valuation. Wesen Corp. will pay a dividend...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nonconstant Growth. Metallica Bearings, Inc., is a...Ch. 7 - Nonconstant Dividends. Hot Wings, Inc., has an odd...Ch. 7 - Nonconstant Dividends. Apocalyptica Corporation is...Ch. 7 - Supernormal Growth. Burton Corp. is growing...Ch. 7 - Negative Growth. Antiques R Us is a mature...Ch. 7 - Finding the Dividend. Gontier Corporation stock...Ch. 7 - LO3 21. PRINTED BY: V.SwathiPpreya@spi-gIobal.com....Ch. 7 - Stock Valuation. According to the 2015 Value Line...Ch. 7 - Prob. 23QPCh. 7 - Negative Growth. According to the 2015 Value Line...Ch. 7 - Prob. 25QPCh. 7 - Stock Valuation and PE. Sully Corp. currently has...Ch. 7 - Stock Valuation and PE. You have found the...Ch. 7 - Prob. 28QPCh. 7 - Stock Valuation and PE. Davis, Inc., currently has...Ch. 7 - PE and Terminal Stock Price. In practice, a common...Ch. 7 - Capital Gains versus Income. Consider four...Ch. 7 - Stock Valuation. Most corporations pay quarterly...Ch. 7 - Prob. 1CCCh. 7 - Prob. 2CC
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- D6 Discuss buying back stock and splitting shares as ways in which the rate of return of stocks is affected. What is the scientific evidence on these issues?arrow_forwardAssuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio d) If Chatterbox Inc. switches to the new dividend policy, what would be the DPS for the next period?arrow_forwardWhat are the four major components of stockholders' equity? Explain each component. (Click the icon to view a list of possible explanations.) (Select the four major components of stockholders' equity and the explanation that best describes each component.) 1. 2. 3. 4. Major component Explanations Explanation a. Includes the cumulative record of: unrealized gains and losses on investment securities, unrealized pension costs, and unrealized foreign currency translation gains or losses. b. An amount that will be due within the next reporting period. c. Includes the capital stock sold by the entity at face or par value and amounts received above par value. d. The historical record of earnings that have not been paid out or distributed as dividends to shareholders. e. The amount of cash stockholders withdraw from the company's bank account. f. The amount of the subsidiary's net assets owned by outside shareholders. Xarrow_forward
- Q2. Do you think that there exists an arbitrage opportunity in the stock market? Please remind the definition of arbitrage opportunities in chapter 3, and we learned about publie and private information, and their influence on stock market prices. Do you agree or disagree? Why or why not?arrow_forwardIn the attached article, what does it mean by the popular asserrtion that dividend increases usually convey good news to investors and dividend cuts convey bad news. https://www.investopedia.com/articles/fundamental/03/102903.asp What are dividends defined in simple terms? and what basic alternatives companies have regarding earnings?arrow_forwardA3) Finance how do I find and compute the equity value of LOW (Lowes) stock?arrow_forward
- 2. Explain why increasing financial leverage increases the risk tolerated by shareholders. 3. In your opinion, why do most businesses with financially attractive investment opportunities continue to sustain conservative capital structures? 4. On the other hand, why do you suppose several promising small businesses fail to follow the recommendation in item 3? 5. One determinant of a company's debt capacity is the liquidity of its assets. Name two common ratios that are exclusively intended to measure the liquidity of a company's assets relative to its liabilities. Give their specific use to the company's performance analyzation.arrow_forwardwhich one is correct please confirm? QUESTION 24 All of the following methods may be used to determine the cost of equity capital (k e) for a non-dividend-paying stock EXCEPT ____. a. comparing with similar dividend-paying stocks in the industry b. the Capital Asset Pricing Model approach c. the risk premium on debt approach d. the simulation with growth expectations approacharrow_forward2. What is the public stock market? Does the Company, such as Disney, own the stock? expalin one small paragrapharrow_forward
- Choose the correct. Which of the following is a registration statement used by large companies that already have a significant following in the stock market?a. Form 8–Kb. Form 10–Kc. Form S–1d. Form S–3arrow_forwardAnswer the multiple-choice question below: 1. Which of the following is/are incorrect about the characteristics of preferred stock: I.It has a fixed maturity date II.Dividends are tax-deductible III.Dividend payments vary just like common stock IV.Can be easily converted to a number of common stock Select one: a. I and II only b. I only c. I, II, and III only d. All of the abovearrow_forwardFinancial markets, Saving and Investment (chapter 13) Q: Rank bonds, common stock, and preferred stock with regard to two factors the possibility of a substantial increase in value. Rank these same securities with regard to investors' legal claims for repayment on their investments. Note Please Highly Requesting Do not Copy Paste Questions From Chegg, Or Coursehero .. I Have Chegg, Courseheroarrow_forward
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What Are Stock Buybacks and Why Are They Controversial?; Author: TD Ameritrade;https://www.youtube.com/watch?v=2O4bmcliaog;License: Standard youtube license