8. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead to
Question:
8. Nonconstant growth stock
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the company's expected growth rate to increase or decrease, thereby affecting the results of the valuation model. For companies in such situations, you would refer to the nonconstant growth model for the valuation of the company's stock.
Consider the case of Green Caterpillar Garden Supplies Inc.:
Green Caterpillar Garden Supplies Inc. (GCGS) just paid a dividend of $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Green Caterpillar's dividend is expected to grow at a constant rate of 2.40% per year.
Complete the following table, assuming that the market is in equilibrium, and:
•The risk-free rate (rRFRF) is 3.00%•The market risk premium (RPMM) is 3.60%, and•Green Caterpillar's beta is 1.10
Note: Do not round intermediate calculations.
Term
Value
(Dollars)
Dividends one year from now (D11)________Horizon Value (HV)________Intrinsic Value________
Which of the following most closely approximates the expected dividend yield for Green Caterpillar's stock today?
A.4.56%
B.3.65%
C.4.76%
D.4.45%
Auditing A Risk Based Approach to Conducting a Quality Audit
ISBN: 978-1305080577
10th edition
Authors: Karla Johnstone, Audrey Gramling, Larry E. Rittenberg