WEEK 6 Flashcards
(42 cards)
The current price of a share should be equal to the ______ of all future dividends.
Reason: It is equal to the present value of all future dividends.
calculate the price of a share that pays a constant dividend of £0.35 if the interest rate is 5.5%.
div / r
0.35/ 0.055
One of the problems with the constant growth model is that when the growth rate equals the discount rate, the share price is ______.
Multiple choice question.
equal to infinity
In addition to the growth rate, what other variable can affect the value of a firm?
The discount rate is paramount in the firm’s value calculation as it calculates the present value of all the firm’s future cash flows.
Which of the following are cash flows provided by equities
Reason: Dividends and selling price (which leads to capital gain or loss) are the two cash flows provided by equities.
Earning next year formula
Earning this year + retained earning this year x return on retained earnings
the growth rate is given by the product of the return on the retained earnings and the
retention ratio
An investor wants to buy a share that is expected to be valued at £60 one year from now and pay a dividend of £2. If the required rate of return is 10%, what is the fair value the investor should pay today?
PV = (60+2) / (1.10) = £56.36
The denominator of the constant dividend share price is
R
Aggreko plc will pay a £2 dividend a year from today. If this dividend is expected to grow at 6% per year for the foreseeable future and the required return on this equity is 10%, what is the fair price of a share of this company?
P0 = £2/(0.10-0.06) = £50
Which of the following variables can affect the price of a share based on the dividend growth model?
The growth rate
The discount rate
The dividend yield is calculated as
the expected cash dividend divided by the current price.
The rate at which the value of the investment grows is also known as
the capital gains yield
If the retention ratio of a firm is 43% and the historical return on equity (ROE) has been 22%, what is the growth rate of the firm?
g = 0.43 x 0.22 = 0.0946 (9.46%)
price is
the present value of future cash flows
If the current dividend yield of a firm is 8% and the expected cash dividend is £0.89 then the current price is
P = 0.898% =£11.125
If the dividend yield of a company is 7.5% and the total return an investor has made on that company is 5.3%, what is the capital gains yield?
Reason: 5.3% - 7.5% = -2.2%
The problem with the use of a short-run estimate of the growth rate of dividends is that
reason: Short-run estimate of the growth rate may not be appropriate for a long-term growth model.
Which of the following assumptions can the estimate of g be based on?
The return on reinvestment of future retained earnings is equal to the firm’s past ROE
Future retention ratio is equal to the past retention ratio
The capital ______ yield is the rate at which the value of the investment grows.
gains
The determination of a required rate of return is highly dependent on
the firm’s growth rate.
Total return can be calculated as
dividend yield plus capital gains yield.
The share price of a non-dividend paying firm will be above zero because
the company could be acquired in the future.
a future dividend is expected by investors.
Which one of the following are correct about growth opportunities?
They are opportunities to invest in profitable projects.
They can represent a significant fraction of a firm’s value.
