26. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.
A. market price
B. dividend yield
C. capital gains yield
D. total return
E. The answer cannot be determined based on the information provided.
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
28. Which one of the following is an underlying assumption of the dividend growth model?
A. A stock has the same value to every investor.
B. A stock's value is equal to the discounted present value of the future cash flows which it generates.
C. A stock's value changes in direct relation to the required return.
D. Stocks that pay the same annual dividend have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.
29. Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
A. an increase in all stock values.
B. all stock values to remain constant.
C. a decrease in all stock values.
D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.
E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.
31. Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any stock.
E. An increase in the required return will decrease the capital gains yield.