Dividend Discount Model MCQs
What does the Dividend Discount Model (DDM) primarily value?
A) Bonds B) Options C) Stocks D) Real estate
Answer: C) Stocks
Which formula represents the value of a stock in the Gordon Growth Model (a version of DDM)?
A) P0=D0(1+g)r−gP_0 = \frac{D_0 (1+g)}{r-g}
B) P0=D1r−gP_0 = \frac{D_1}{r-g}
C) P0=D0r+gP_0 = \frac{D_0}{r+g}
D) P0=D1r+gP_0 = \frac{D_1}{r+g}
Answer: B) P0=D1r−gP_0 = \frac{D_1}{r-g}
In the Dividend Discount Model, what does D1D_1 represent?
A) The last dividend paid B) The next expected dividend C) The average dividend over the past 5 years D) The dividend growth rate
Answer: B) The next expected dividend
What is the primary assumption of the Gordon Growth Model?
A) Dividends will grow at a constant rate indefinitely B) Dividends will decline at a constant rate C) Dividends will remain constant forever D) The stock price will fluctuate randomly
Answer: A) Dividends will grow at a constant rate indefinitely
In the Dividend Discount Model, what does rr represent?
A) The dividend growth rate B) The required rate of return C) The last dividend paid D) The future stock price
Answer: B) The required rate of return
Which of the following formulas calculates the expected price of a stock with dividends growing at a constant rate?
A) P0=D0r−gP_0 = \frac{D_0}{r-g}
B) P0=D0(1+g)r−gP_0 = \frac{D_0 (1+g)}{r-g}
C) P0=D1r+gP_0 = \frac{D_1}{r+g}
D) P0=D1(1+g)r−gP_0 = \frac{D_1 (1+g)}{r-g}
Answer: B) P0=D0(1+g)r−gP_0 = \frac{D_0 (1+g)}{r-g}
If the required rate of return is 8% and the dividend growth rate is 5%, what is the expected dividend yield if the stock price is $100?
A) 3% B) 5% C) 8% D) 13%
Answer: B) 5%
What is the Dividend Discount Model’s limitation related to constant growth assumptions?
A) It is not applicable to companies with irregular dividends B) It cannot value stocks with zero dividends C) It assumes dividends will grow at a variable rate D) It assumes dividends will be constant forever
Answer: A) It is not applicable to companies with irregular dividends
Which model can be used if dividends are expected to grow at different rates in the near term?
A) Gordon Growth Model B) Two-Stage Dividend Discount Model C) Constant Dividend Model D) Dividend Growth Rate Model
Answer: B) Two-Stage Dividend Discount Model
In the Two-Stage Dividend Discount Model, what happens during the initial stage?
A) Dividends grow at a constant rate B) Dividends are constant C) Dividends grow at a variable rate D) Dividends decline at a fixed rate
Answer: C) Dividends grow at a variable rate
How is the present value of future dividends calculated in the Two-Stage Dividend Discount Model?
A) Sum of the present value of dividends in the first stage plus the present value of dividends in the second stage B) Sum of the dividend growth rates C) Present value of the first stage dividends only D) Present value of the second stage dividends only
Answer: A) Sum of the present value of dividends in the first stage plus the present value of dividends in the second stage
What is the primary advantage of using the Dividend Discount Model?
A) It can be applied to all types of investments B) It provides a straightforward method for valuing stocks based on dividends C) It considers market conditions D) It uses historical stock prices for valuation
Answer: B) It provides a straightforward method for valuing stocks based on dividends
Which formula represents the present value of dividends in the first stage of the Two-Stage Dividend Discount Model?
A) PV1=∑t=1nDt(1+r)tPV_1 = \sum_{t=1}^n \frac{D_t}{(1+r)^t}
B) PV1=D0(1+g1)r−g1PV_1 = \frac{D_0 (1+g_1)}{r-g_1}
C) PV1=D0(1+g2)r−g2PV_1 = \frac{D_0 (1+g_2)}{r-g_2}
D) PV_1 = \frac{D_0 (1+r)^n}
Answer: A) PV1=∑t=1nDt(1+r)tPV_1 = \sum_{t=1}^n \frac{D_t}{(1+r)^t}
What does the terminal value represent in the Two-Stage Dividend Discount Model?
A) The value of dividends during the initial growth stage B) The present value of dividends during the terminal stage C) The value of dividends after the initial stage D) The dividend yield of the stock
Answer: C) The value of dividends after the initial stage
In the Dividend Discount Model, what happens if the required rate of return exceeds the dividend growth rate?
A) The model cannot be used B) The stock price becomes negative C) The stock price increases indefinitely D) The model provides a finite stock price
Answer: D) The model provides a finite stock price
Which of the following factors is NOT considered in the Dividend Discount Model?
A) Dividend growth rate B) Market volatility C) Required rate of return D) Dividends per share
Answer: B) Market volatility
If a stock’s dividend is expected to be $5 next year, and the dividend growth rate is 4% with a required rate of return of 9%, what is the value of the stock using the Gordon Growth Model?
A) $100 B) $105 C) $110 D) $95
Answer: A) $100
In the Dividend Discount Model, what does gg represent?
A) The growth rate of dividends B) The rate of return C) The expected stock price D) The last dividend paid
Answer: A) The growth rate of dividends
Which Dividend Discount Model is best suited for valuing stocks with variable growth rates?
A) Gordon Growth Model B) Two-Stage Dividend Discount Model C) Constant Dividend Model D) Zero Growth Model
Answer: B) Two-Stage Dividend Discount Model
How does the Dividend Discount Model handle companies that do not pay dividends?
A) It provides an accurate valuation B) It cannot be used C) It estimates future dividends based on earnings D) It assumes a fixed dividend yield
Answer: B) It cannot be used
If the expected dividend of a stock is $2, the required rate of return is 10%, and the dividend growth rate is 5%, what is the value of the stock using the Gordon Growth Model?
A) $20 B) $40 C) $25 D) $10
Answer: C) $25
Which assumption of the Gordon Growth Model limits its applicability?
A) Constant dividend growth rate B) Constant stock price C) Constant dividend yield D) Constant required rate of return
Answer: A) Constant dividend growth rate
In the Dividend Discount Model, how is the present value of the stock calculated?
A) By discounting future dividends B) By averaging past stock prices C) By summing historical earnings D) By estimating future stock prices
Answer: A) By discounting future dividends
What happens to the stock price if the required rate of return increases, assuming all other factors remain constant?
A) The stock price increases B) The stock price decreases C) The stock price remains unchanged D) The stock price becomes volatile
Answer: B) The stock price decreases
If the required rate of return is 12% and the dividend growth rate is 7%, what is the maximum allowable dividend growth rate for the Gordon Growth Model to be valid?
A) 10% B) 12% C) 7% D) 15%
Answer: C) 7%
Which model is used to value a stock with an initial high growth phase followed by a constant growth phase?
A) Gordon Growth Model B) Constant Dividend Model C) Two-Stage Dividend Discount Model D) Zero Growth Model
Answer: C) Two-Stage Dividend Discount Model
What happens to the value of a stock if the dividend growth rate is increased, holding the required rate of return constant?
A) The stock value decreases B) The stock value remains unchanged C) The stock value increases D) The stock value becomes zero
Answer: C) The stock value increases
In a multi-stage Dividend Discount Model, how is the terminal value typically calculated?
A) By summing the present value of dividends B) By using the Gordon Growth Model after the high growth phase C) By applying the dividend yield to the stock price D) By calculating the average historical dividends
Answer: B) By using the Gordon Growth Model after the high growth phase