Common stock value: Constant growth The common stock of Barr Labs Inc., trades for $106 per share. Investors expect the company to pay a(n) $1.42 dividend next year, and they expect that dividend to grow at a constant rate forever. It investors require a(n) 15.2% re on this stock, what is the dividend growth rate that they are anticipating? The anticipated dividend growth rate is%. (Round to two decimal places.) G
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![**Common Stock Value: Constant Growth**
The common stock of Barr Labs Inc. trades for $106 per share. Investors expect the company to pay a $1.42 dividend next year, and they expect that dividend to grow at a constant rate forever. If investors require a 15.2% return on this stock, what is the dividend growth rate that they are anticipating?
The anticipated dividend growth rate is ___%. (Round to two decimal places.)
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This exercise is designed to help students understand the concept of stock valuation using the constant growth model, also known as the Gordon Growth Model. This model assumes that dividends will increase at a constant rate indefinitely. To find the anticipated dividend growth rate, one must solve the equation derived from the model:
\[ P = \frac{D_1}{r - g} \]
Where:
- \( P \) is the price of the stock ($106 in this case).
- \( D_1 \) is the expected dividend next year ($1.42).
- \( r \) is the required rate of return (15.2%).
- \( g \) is the anticipated growth rate of dividends.
Students can rearrange this formula to solve for \( g \), providing practical experience in financial analysis and valuation techniques.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F553f4f5a-ebc3-465d-ae10-30fadeaa7064%2F2777269b-61d7-4ff7-a5ec-e5f0e88637be%2F93ff8b2_processed.png&w=3840&q=75)
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