Question: Practice 8.1 Constant Dividend Growth Model Suppose we have a stock with the following information: Dividend Next year: $5.00 Dividend growth rate: 6.00% Required return:

Practice 8.1 Constant Dividend Growth Model

Suppose we have a stock with the following information: Dividend Next year: $5.00 Dividend growth rate: 6.00% Required return: 15.00% With this growth rate, the dividend next year will be: So, the stock price today with the constant dividend growth model is:

Stock price today: The constant dividend growth equation is the present value of a growing perpetuity, but we should caution that the equation is very sensitive to the growth rate estimate.

Using the same information from above, we can calculate the stock price for various growth rates.

Practice 8.1 Constant Dividend Growth Model Suppose we have a stock with

Suppose we have a stock with the following information: $ Dividend Next year: Dividend growth rate: Required return: With this growth rate, the dividend next year will be: 5.00 6.00% 15.00% So, the stock price today with the constant dividend growth model is: Stock price today: The constant dividend growth equation is the present value of a growing perpetuity, but we should caution that the equation is very sensitive to the growth rate estimate. Using the same information from above, we can calculate the stock price for various growth rates. Stock price g 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% Graphing the stock price versus the growth rate, we can see the impact of the growth rate

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Cinder Inc. is a Canadian-controlled private corporation based in your province. The company operates a wholesale business. The following information is provided for its year ended May 31, 2020: 1....

Chapter 8 - Practice Questions (Please fill in the highlighted cells in light blue.) Practice 8.1 Constant Dividend Growth Model Suppose we have a stock with the following information: $ Dividend...

Please can you solve this in excel. Practice 8.1 Constant Dividend Growth Model Suppose we have a stock with the following information: W So, the stock price today with the constant dividend growth...

Problem 2i (20 points) Suppose you hold a 6 percent coupon bond with a par value of $1,000 that matures in 12 years and pays semi-annual coupons 1) If the bond's yield to maturity is 8 percent, what...

MC algo 8-6 Constant Dividend Growth Model Stoneheart Group is expected to pay a dividend of $3.01 next year. The company's dividend growth rate is expected to be 4.7 percent indefinitely and...

1. TRUE OR FALSE A 100% stock dividend results in a doubling of the number of outstanding shares, but it does not affect the company's assets, profits, or total value. 2. Which one of these...

1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as...

1.Costlo Co. just paid total dividends of $174600 and reported additions to retained earnings of $349200. The company has 72600 shares of stock outstanding and a benchmark PE of 14 times. What stock...

5. Which one of the following applies to the constant dividend growth model (or Gordon model) of stock valuation? a) The dividend amount must be constant over time. b) The growth rate must be less...

Problem 2: You are asked to evaluate the common stock of Bumble Bee Seafood (ticker symbol: BEE) using the constant dividend growth model and the CAPM. The stock is currently priced (Po) at $44.20...

Q1 Q2 Q3 Q4 Q5 Q6 Q7 You want a seat on the board of directors of Boulevard Bolt, Incorporated. The company has 300,000 shares of stock outstanding and the stock sells for $67 per share. There are...

On November 1, an exterior painting company received $ 5,310 for a paint job that will not be finished for a few months. As of December 31, which is the end of the fiscal period, $ 2,400 worth of...

H Ltd has one subsidiary, S Ltd. The company has held a controlling interest for several years. The latest financial statements for the two companies and the consolidated financial statements for the...

What is the financial impact of revising the current situation

Draw a class diagram and its relationship based on the following statements. You can use any UML tool/software to represent your class diagram. Do NOT copy and paste your diagram, use the attachment...