FIN 370 Chapter 8 UPDATED ACTUAL and Correct Answers
Question: Non-constant growth means ____________ growth rates over some finite
length of time.
-unexpected
-required
-weighted
-supernormal
-declining
Answer:
supernormal
Question: Let's look at a company that is currently not paying dividends. You predict
that in five years the company will pay a dividend for the first time. The
dividend will be $0.50 per share. You expect the dividend to grow at an 8%
rate per year indefinitely at that time. The required return on companies like
this one is 15%. What is the price of the stock today?
Answer:
$4.08
P4 = D5/(R-g)
= $.50/(.15-.08)
= $7.1429
P0 = $7.
.15^4 = $7.
.749 = $4.08
Question: The price the dealer is willing to pay is called the ________ price.
-spread
-ask
-bid
-dealer
-required
Answer:
bid
Question: The difference between the bid and ask prices is called the _________, and is
the basic source of dealer profits.
, -dealer
-required
-spread
-ask
-bid
Answer:
spread
Question: If the current dividend (D0) is $3.00 and the growth rate is 6%. How much
will the dividend be at Time 5?
Answer:
$4.015
Dt=D0 × (1 + g)^t
D5=D0 × (1 + g)^5
D5=$3.00 × (1 + .06)^5
D5=$3.00 × 1.3382
D5=$4.015
Question: Two-stage growth is a special case of __________ growth.
-weighted
-supernormal
-unexpected
-non-constant
-required
Answer:
non-constant
Question: A company's dividend is expected to grow at 20% for the next six years. After
that, the growth is expected to be 3% forever. If the required return is 10%,
what is the value of the stock at time 6? The dividend just paid was $1.
Answer:
$43.94
P6=D7/R − g2
=[D0 × (1 + g1)^6 × (1 + g2)]/(R - g2)
=[$1 × (1 + .20)^6 × (1 + .03)]/(.10 − .03)
=[$2.9860 × (1 + .03)]/(.10 − .03)
Question: Non-constant growth means ____________ growth rates over some finite
length of time.
-unexpected
-required
-weighted
-supernormal
-declining
Answer:
supernormal
Question: Let's look at a company that is currently not paying dividends. You predict
that in five years the company will pay a dividend for the first time. The
dividend will be $0.50 per share. You expect the dividend to grow at an 8%
rate per year indefinitely at that time. The required return on companies like
this one is 15%. What is the price of the stock today?
Answer:
$4.08
P4 = D5/(R-g)
= $.50/(.15-.08)
= $7.1429
P0 = $7.
.15^4 = $7.
.749 = $4.08
Question: The price the dealer is willing to pay is called the ________ price.
-spread
-ask
-bid
-dealer
-required
Answer:
bid
Question: The difference between the bid and ask prices is called the _________, and is
the basic source of dealer profits.
, -dealer
-required
-spread
-ask
-bid
Answer:
spread
Question: If the current dividend (D0) is $3.00 and the growth rate is 6%. How much
will the dividend be at Time 5?
Answer:
$4.015
Dt=D0 × (1 + g)^t
D5=D0 × (1 + g)^5
D5=$3.00 × (1 + .06)^5
D5=$3.00 × 1.3382
D5=$4.015
Question: Two-stage growth is a special case of __________ growth.
-weighted
-supernormal
-unexpected
-non-constant
-required
Answer:
non-constant
Question: A company's dividend is expected to grow at 20% for the next six years. After
that, the growth is expected to be 3% forever. If the required return is 10%,
what is the value of the stock at time 6? The dividend just paid was $1.
Answer:
$43.94
P6=D7/R − g2
=[D0 × (1 + g1)^6 × (1 + g2)]/(R - g2)
=[$1 × (1 + .20)^6 × (1 + .03)]/(.10 − .03)
=[$2.9860 × (1 + .03)]/(.10 − .03)
