Question

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to:_______A. VO= (Market return in year 1)/k. B. VO= (Treasury bond yield in year 1)/k. C. VO= (expected dividend yield in year 1)/k. D. VO= (expected EPS in year 1)/k.

Answer 1

The correct answer is C. VO= (expected dividend yield in year 1)/k. This simplification occurs when the expected Return on Equity is equal to the discount rate in the Dividend Discount Model for stock valuation.

Step-by-step explanation:

The student's question addresses the topic of valuation using the Dividend Discount Model (DDM) in the context of Business and Finance. The dividend yield is a crucial concept in valuing stocks using this model. If the expected Return on Equity (ROE) on reinvested earnings equals the discount rate (k), we can simplify the multistage DDM to a single-stage model, which assumes that the growth rate of dividends stays constant.

Using the information provided, the correct answer to the student's question is: VO= (expected dividend yield in year 1)/k. That's because the value of a stock is the present value of all expected future dividends, discounted back at a rate that reflects the riskiness of those dividends.

In this case, the multistage DDM reduces to a simpler form which reflects the present value of the expected dividend yield when the growth rate (R) is equal to the discount rate (k). Hence, the expected dividends are not growing over time, and the stock is valued as if it paid a perpetuity.

Answer 2

VO = ( expected EPS in year 1 )/k ( D )

Step-by-step explanation:

The multistage DDM reduces to, VO = ( expected EPS in year 1 )/k, The expected ROE on reinvested earnings been equal to K shows that the ROE is constant. since it is constant the value on returned earnings would be zero.

this simply means that EPS = DPS