"Equity Investments":The company's financial leverage ratio
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Questions 1:
Which of the following transactions is most likely to affect a company’s financial leverage ratio?
A、 Payment of a 9% stock dividend
B、 An increase in cash dividends paid
C 、Completion of a previously announced 1-for-20 reverse stock split
Questions 2:
The Gordon growth model is most appropriate for valuing the common stock of a dividend paying company that is:
A 、mature and relatively insensitive to economic fluctuations.
B、 young and just entering the growth phase.
C、 experiencing growth that is higher than the sustainable growth rate.
B is correct. Cash dividends affect a company’s capital structure and financial leverage ratios by reducing assets and shareholders’ equity.
A is incorrect. Neither stock splits nor stock dividends affect a firm’s financial leverage ratio.
C is incorrect. Neither stock splits nor stock dividends affect a firm’s financial leverage ratio.
A is correct. The Gordon growth model is most appropriate for valuing common stock of a dividend paying company that is mature and relatively insensitive to the business cycle or economic fluctuations.
B is incorrect. A three-stage dividend discount model would be most appropriate for a fairly young company that is just entering the growth phase.
C is incorrect. A two-stage dividend discount model would be appropriate for a company that is experiencing a higher than the sustainable growth rate.
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