Question

7. An increase in the retention ratio will:
A. increase the dividends per share.
B. decrease a firm's sustainable rate of growth. C. decrease the equity of a firm.
D. increase the dividend growth rate.
E. increase the value of a firm's stock.

8. Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock? A. irregular dividend

B. constant perpetual growth C. constant dividend
D. two-stage dividend growth E. perpetuity formula

Answer 1

7. An increase in the retention ratio will decrease the dividends , increase the sustainable growth rate , increase the equity( as equity decreases as dividend increases)

It will increase the value of the stock.

The correct option is option E.

8. Two stage dividend discount model

the correct option is option D.

As the net income is increasing 20% every year and then tapering off to a constant if 5%,as the dividend payout is constant,

the dividend will increase and then taper off to a constant of 5%.

So ,we use a 2 stage dividend discount model.