The appropriate valuation model for stock index

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Reference no: EM131987151

1. Assume that the Constant-Growth DDM is the appropriate valuation model for a stock index such as the Dow Jones Industrial Average (DJIA). Assume further that the long-term annual market return for the DJIA is expected to be 8%, the long-term expected growth rate in dividends for the DJIA is expected to be 3.5% and that the DJIA is currently fairly valued at 18,000. If investors change their expectation for the long-term growth rate in dividends from 3.5% to 2.5%, what would be the expected change in the value of the DJIA?

A. +18.97%

B. -18.97%

C. +15.38%

D. -15.38%

2. When using relative valuation (RV), if company A is being compared to companies B through G, the ratios of company A should be _____________ the calculation of median and standard deviation of the ratios.

A. excluded from

B. included in

C. multiplied by .5 in

D. multiplied by 1.5 in

3. The relative valuation (RV) approach assumes that the other firms used in the analysis are ______________ the firm being valued.

A. comparable to

B. unlike

C. more risky than

D. less risky than

Reference no: EM131987151

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