Equity Valuation: Present Value & Dividends

If a stock's current price is $P_0$, the expected dividend next year is $D_1$, and the expected price next year is $P_1$, which formula correctly represents the holding period return (HPR), denoted as 'r'?

What does 'ex-dividend' mean in the context of stock prices?

A stock is expected to pay a dividend of $5 next year ($D_1 = 5$) and is expected to be priced at $105 next year ($P_1 = 105$). If the required rate of return is 10%, what is the current price ($P_0$) of the stock, according to the present value formula?

What is the dividend yield of a stock if the current price is $50 and the dividend expected next year is $2.50?

What is the key difference between valuing fixed income securities (bonds) and equity (stocks) using present value methods?

What is another term for equity in a company?

If the price of a stock today ($P_0$) is $20, and the dividend to be paid next year ($D_1$) is $1, and you expect the stock price to be $22 next year ($P_1$), what is the percent capital gain?

Which of the following best describes equity as a 'residual claim'?

A company's stock is valued using a two-stage dividend growth model. The present value of the first stage is $10, and the terminal value of the second stage, calculated as $2.20/0.05, is the present value of the second stage. What is the stock's total value?

Which of the following is NOT a step in valuing stocks using multistage dividend growth models?

What does the 'plowback ratio' represent in the context of a company's earnings?

If a company has earnings per share (E) and a plowback ratio (b), what is the formula for calculating the dividends per share (D)?

What does Return on Equity (ROE) measure?

Given a company with a Return on Equity (ROE) that remains constant, what is the relationship between ROE, plowback ratio (b), and the growth rate (g)?

A company decides to increase its plowback ratio. Assuming its ROE remains constant, what is the likely impact on the company's growth rate and current dividend payout?

A company has a return on equity (ROE) of 12% and a plowback ratio of 40%. What is the company's growth rate (g)?

What is the correct method to determine the present value of a stock with two distinct growth phases?

Which formula is most appropriate for calculating the present value of dividends in Phase I, assuming dividends grow at a constant rate $g_1$ for N years?

In Phase II, dividends are expected to grow at a different rate, $g_2$. Which of the following formulas is most appropriate for finding the present value of Phase II dividends at time N?

After calculating the present value of Phase II dividends at time N, what additional step is necessary to find the present value of Phase II at time 0?

If the discount rate, r, is equal to the growth rate in Phase I, $g_1$, how does this affect the calculation of the present value of Phase I?

Given $D_1$ (dividend at time 1), $g_1$ (growth rate during phase 1), N (number of periods in phase 1), $g_2$ (growth rate during phase 2) and r (discount rate), which expression correctly represents the present value of Phase II?

What critical assumption underlies the use of the growing perpetuity formula in Phase II?

A company is expected to have two distinct growth phases. Phase I will last for 5 years with a growth rate of 10%, and Phase II will have a growth rate of 4% thereafter. If the current dividend is $2 and the required rate of return is 12%, which components do you need to compute the present value of the stock?

In the context of corporate finance, what does a positive NPVGO (Net Present Value of Growth Opportunities) indicate for a company?

The formula $P_0 = \frac{E}{r} + NPVGO$ suggests that a firm's value can be decomposed into two components. What do these components represent?

When using the NPVGO valuation formula, under what conditions is the result equivalent to calculating the present value of future dividends?

A company is considering a single investment opportunity at t=1. The cost is $8 per share, and earnings are expected to increase by $1.68 per share in all subsequent periods due to this investment. If the required rate of return (r) is 8%, what is the NPV at t=1 of this growth opportunity?

Assume a firm has earnings per share (E) of $5, a required rate of return (r) of 10%, and an NPVGO of $30. According to the formula $P_0 = \frac{E}{r} + NPVGO$, what is the price per share ($P_0$)?

What does 'E' represent in the formula $P_0 = \frac{E}{r} + NPVGO$?

According to the content, what is the cost of the single investment opportunity?

What earnings are expected to increase by due to the single investment opportunity?

According to the dividend growth model, what is the relationship between the required rate of return (r) and the dividend growth rate (g) for the model to be valid?

A company's dividends are expected to grow at a constant rate of 8%. If the current stock price is $50 and the expected dividend next year is $2.50, what is the required rate of return?

A company is expected to have a high growth phase for 3 years, followed by a stable growth phase. Which of the following is NOT a step in calculating the present value of its stock?

What best explains why the constant dividend growth model may not be suitable for all companies?

Consider a company with two distinct growth phases: a high-growth period for N years at rate g1, followed by a stable growth rate g2. Which statement accurately describes the dividend calculation for year N+1?

A company is expected to grow at 20% for the next 4 years and then stabilize at a constant rate of 5% thereafter. If the most recent dividend was $1.50 and the required rate of return is 12%, what is the estimated stock price today? (This question requires calculations).

What is the primary limitation of using a multi-stage dividend growth model (differential growth)?

A stock's price is $80, and the company just paid a dividend of $4. Analysts predict a constant growth rate of 6%. What is the required rate of return on this stock?

A firm has an ROE of 20% and a plowback ratio of 0.4. If the current equity is $500, what is the expected equity in the next period?

A company's stock is currently trading at $50. If the company's earnings per share (E1) is expected to be $5, the plowback ratio is 0.6, and the required rate of return (r) is 12%, is the stock overvalued or undervalued?

What is the relationship between growth (g), plowback ratio (b), and return on equity (ROE)?

According to the content, what condition typically leads to a fall in ROE over time?

A company is considered a 'cash cow' when:

A firm has a constant ROE of 12% and plans to maintain a constant plowback ratio of 0.5. If the earnings per share next year (E1) are expected to be $4, what is the present value of the stock if the required rate of return is 15%?

Assume a firm has a Return on Equity (ROE) of 25% and a plowback ratio of 0.4. If the earnings at time 1 are $10 million ($E_1$), what are the expected earnings at time 2 ($E_2$)?

Why is it important to consider the relationship between $b$, $ROE$, and $r$ (required rate of return) when valuing a company?

Constant Dividend Growth

Expected Dividends (D1)

Growth Rate (g)

Discount Rate (r)

Price Today (P0)

Growing Perpetuity Formula

Differential Growth

Two-Phase Dividend Growth

Equity

Dividend (D1)

Current price per share (P0)

Holding period return (HPR)

Dividend yield (D1/P0)

Capital gain

Discounted value of future payments

Price next year (P1)

Present Value of Phase I

Growing Annuity Formula

Phase I PV Formula

Present Value of Phase II

Delayed Perpetuity

Discounting Back to Time 0

Substituting for DN

Return on Equity (ROE)

Plowback Ratio (b)

Retained Earnings

Equity (E)

Constant Growth Dividend Formula

Price-Earnings Ratio (P/E)

Cash Cow

Total Payout Rate (TPR)

Earnings per Share (E)

Earnings Growth (g)

Present Value (PV) of Stages

Dividend Growth Stages

NPVGO

Cash Cow Value

Present Value (PV) of Dividends

Single Growth Opportunity

Investment Cost

Earnings Increment

Positive NPV

Total Price Calculation