Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 7.4, Problem 7.14RQ
Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm's risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growth rate of dividends is expected to increase.
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Students have asked these similar questions
The dividend growth model CANNOT be used in which of the following?
a. When dividends are expected to grow every year.
b. When the payout ratio is constant.c. When dividends are expected to grow every quarter.
d. When the payout is greater than the amount earned.
Answer this question based on the dividend growth model. If you expect the required rate of return to increase across the board on all equity securities, then you should also expect:
Group of answer choices
An increase in all stock values.
Negative stock values.
An increase or a decrease in all stock values.
A decrease in all stock values.
All stock values to remain constant.
Given the dramatic decrease in a company's stock price last year, what would be the impact on the firm's asset beta, equity beta, and their WACC? Explain your responses!
Chapter 7 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.9RQCh. 7.3 - Describe, compare, and contrast the following...
Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.13RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 7.1STPCh. 7 - Learning Goal 5 ST7-2 Free cash flow valuation...Ch. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Preferred dividends Acura Labs Inc. has an...Ch. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Learning Goal 4 P7- 11 Common stock value:...Ch. 7 - Prob. 7.12PCh. 7 - Prob. 7.13PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Learning Goal 5 P7-17 Free cash flow valuation...Ch. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Integrative: Risk and valuation Hamlin Steel...Ch. 7 - Prob. 7.25P
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- (1) Write out a formula that can be used to value any dividend-paying stock, regardless of its dividend pattern. (2) What is a constant growth stock? How are constant growth stocks valued? (3) What happens if a company has a constant gL that exceeds its rs? Will many stocks have expected growth greater than the required rate of return in the short run (i.e., for the next few years)? In the long run (i.e., forever)?arrow_forwardOne stock valuation model holds that the value of a share of stock is a function of its ends will increase at an annual rate which will remain unchangedover time. This stock valuation model is known as the * approximate yield model. holding period return model. constant growth dividend valuation model. dividend reinvestment model.arrow_forwardOne stock valuation model holds that the value of a share of stock is a function of its futuredividends, and that the dividends will increase at an annual rate which will remain unchangedover time. This stock valuation model is known as the * A.approximate yield model. B.holding period return model. C.constant growth dividend valuation model. D.dividend reinvestment model.arrow_forward
- The dividend-growth model, suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors’ required return is 12 percent. The current dividend is $0.9 a share and is expected to grow annually by 8 percent, so the current market price of the stock is $24.3. Management may make an investment that will increase the firm’s growth rate to 9 percent, but the investment will require an increase in retained earnings, so the firm’s dividend must be cut to $0.4 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent. The value of the stock to $ , so the management make the investment and decrease the dividend.arrow_forwardThe common stock of National Company pays a constant annual dividend. Thus, the market price of National Company’s stock will decrease when the market rate of return increases decrease over time increase over time increase when the market rate of return increasesarrow_forwardExpected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: Pˆ0 = D1(rs – g) Which of the following statements is true? Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth. Increasing dividends will always increase the stock price. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return? 13.82% 656.87% 992.14%…arrow_forward
- Which statement is true? The cost of preferred stock remains constant from year to year. Preferred stock is valued using the perpetuity present value formula. Preferred stock is generally the cheapest source of capital for a firm. An increase in the market value of preferred stock will increase a firm's weighted average cost of capital.arrow_forwardbased on the current variables that may impact stock demand, such as inflation, budget deficit, monetary policies, political situations, and investor's sentiment generally. Do you believe that stock prices will grow or drop this year's end based on these conditions? Justify your response using logic. Which of the following factors do you believe will have the greatest influence on stock prices?arrow_forwardWhat is the expected return on a stock if the firm will earn 24% during a period of economic boom, 14% during normal economic periods, and 2% during a period of recession if the probabilities of these economic environment are 20%, 65% and 15%, respectively?arrow_forward
- The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstancesarrow_forwardEach stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."arrow_forwardBased on the Dividend Discount Model, if a company’s projected rate of growth in earnings and dividends is expected to increase, what effect will it have on its stock? Question 9 options: The value would decrease. The value would increase. The value would not change. It is undeterminable.arrow_forward
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