Giant Enterprises stock has a required return of 14.8%. The company, which plans to pay a dividend
Question:
Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2006–2012 period, when the following dividends were paid:
a. If the risk-free rate is 10%, what is the risk premium on Giant’s stock?
b. Using the constant-growth model, estimate the value of Giant’s stock.
c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant’s stock.
Dividend A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company.
Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions.
For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.