Multiple choice

1. The expected rate of return or the cost of equity capital is estimated as follows:  

a. Dividend yield - expected rate of growth in dividends 

b. Dividend yield + expected rate of growth in dividends 

c. Dividend yield / expected rate of growth in dividends 

d. (Dividend yield) * (expected rate of growth in dividends) 

2. Dividend growth rate for a stable firm can be estimated as:  

a. Plow back rate / the return on equity (ROE) 

b. Plow back rate * the return on equity (ROE) 

c. Plow back rate + the return on equity (ROE) 

d. Plow back rate - the return on equity (ROE) 

3. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm?  

a. 9% 

b. 5% 

c. 6% 

d. 15% 

4. Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected to grow at 20% per year for the next four years and then grow 6% per year thereafter. Calculate the expected dividend in year 5.  

a. $4.15 

b. $2.95 

c. $4.40 

d. $3.81