a. What is its value if the previous dividend was Do = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 4%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
a. What is its value if the previous dividend was Do = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 4%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
answer each component PLEASE.
![Investors require a 7% rate of return on Levine Company's stock (i.e., \( r_s = 7\%\)).
a. What is its value if the previous dividend was \( D_0 = \$2.25 \) and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 4%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
1. $
2. $
3. $
4. $
b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results?
I. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate.
II. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return.
III. These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate.
IV. These results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate.
V. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate.
[Select Option]
c. Is it reasonable to think that a constant growth stock could have \( g > r_s \)?
I. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.
II. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return.
III. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return.
IV. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return.
V. It is reasonable for a firm to grow indefinitely at a rate higher than its required return.
[Select Option]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2Faa7cafee-67c5-4646-afb6-31e78160f447%2F41z41ir_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Investors require a 7% rate of return on Levine Company's stock (i.e., \( r_s = 7\%\)).
a. What is its value if the previous dividend was \( D_0 = \$2.25 \) and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 4%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
1. $
2. $
3. $
4. $
b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results?
I. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate.
II. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return.
III. These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate.
IV. These results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate.
V. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate.
[Select Option]
c. Is it reasonable to think that a constant growth stock could have \( g > r_s \)?
I. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.
II. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return.
III. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return.
IV. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return.
V. It is reasonable for a firm to grow indefinitely at a rate higher than its required return.
[Select Option]
![A stock is expected to pay a dividend of $0.50 at the end of the year (i.e., D₁ = $0.50), and it should continue to grow at a constant rate of 10% a year. If its required return is 14%, what is the stock's expected price 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
$ [ ]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2Faa7cafee-67c5-4646-afb6-31e78160f447%2Fyk18buf_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A stock is expected to pay a dividend of $0.50 at the end of the year (i.e., D₁ = $0.50), and it should continue to grow at a constant rate of 10% a year. If its required return is 14%, what is the stock's expected price 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
$ [ ]
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education