[Anonymous]

Similar/Same MC #2: I guess both of MCs are similar. However, I am very confused. Pls help on how those lower ROE and higher dividend growth are connected…? Your help is greatly appreciated.

Wiley TestBank: FINM-0041

The market value of a firm’s outstanding common shares will be higher, everything else equal, if

A: Investors have a lower required return on equity.

B: Investors expect lower dividend growth.

C: Investors have longer expected holding periods.

D: Investors have shorter expected holding periods.

Answer Explanations

Answer A is correct. Investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.

Answer B is incorrect. Lower expected dividend growth would reduce, not increase, the market value of the outstanding common shares of the company.

Answer C is incorrect. Expected holding periods of investors are not relevant to market valuation of the outstanding common shares of the company.

Answer D is incorrect. Expected holding periods of investors are not relevant to market valuation of the outstanding common shares of the company.

Wiley Module 45: #118

Assume that two companies, Company X and Company Y, are alike in all respects, except the market value of the outstanding common shares of Company X is greater than the market value of Company Y shares. This may indicate that:

a. Company X’s investors expect higher dividend growth than company Y’s investors.

b. Company X’s investors expect lower dividend growth than Company Y’s investors.

c. Company X’s investors have longer expected holding periods than company Y’s investors.

d. Company X’s investors have shorter expected holding periods than company Y’s investors.

Answer Explanations

(a) Is correct: the requirement is to identify the impact of investor expectations on stock price. Answer a is correct because if investors expect a higher dividend growth rate, the market value of the common shares will be greater.