Consider a firm that had been priced using a 10 percent growth rate and a 12 percent required return. The firm recently paid a 1.20$ dividend. The firm has just announced that it will likely grow at 10.5 percent rate because of a new joint venture. How much should the stock price change in dollars and percentage?

Consider a firm that had been priced using a 10 percent growth rate and a 12 percent required return. The firm recently paid a 1.20$ dividend. The firm has just announced that it will likely grow at 10.5 percent rate because of a new joint venture. How much should the stock price change in dollars and percentage?

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

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The dividend-growth model, suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors’ required return is 12 percent. The current dividend is $0.9 a share and is expected to grow annually by 8 percent, so the current market price of the stock is $24.3. Management may make an investment that will increase the firm’s growth rate to 9 percent, but the investment will require an increase in retained earnings, so the firm’s dividend must be cut to $0.4 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent. The value of the stock to $ , so the management make the investment and decrease the dividend.
Suppose you are considering buying the stocks of two companies that are similar in many respects. Both companies are expected to earn $6 per share in the coming year. Company A is expected to pay out the entire amount of earning as dividends one year from now, while company B is expected to pay out only half of the earnings as dividend, i.e. $3 per share. Both require a rate of return of 14%. A's constant growth of rate is 0, while B's is 5%. What are the expected prices of Stocks A and B? Stock A $42.86; Stock B $33.33 Stock A $50.12; Stock B $60.25 Stock A $35.86; Stock B $45.80
Question: Hart Enterprises recently paid a dividend of $1.25. It expects to have non constant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%. a. How far away is the terminal, or horizon, date? b. What is the firm's horizon, or terminal, value? c. What is the firm's intrinsic value today?
(2) Computer stocks currently provide an expected rate of return of 10%. MBC, a large computer company, will pay a year-end dividend of $1.5 per share. If the stock is selling at $75 per share, what must be the market's expectation of the growth rate of MBC dividends?
Company DELTA has just paid a dividend of $1.15. The required rate if return on the stock is 13.4% and investors expect the dividend to grow at a constant rate of 8% in the future. a)Calculate the current stock value using the Gordon Constant growth model. b)Evaluate Gordon growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results?
A firm pays a current dividend of $2, which is expected to grow at a rate of 3% indefinitely. If the current value of the firm’s shares is $25, what is the required return applicable to the investment based on the constant-growth model?
Provide the correct accurate answer
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Assume that Stock X is fairly priced today. Stock X just distributed a per share dividend of $1. It is expected that the company will increase its dividend by 20% in the coming year, 15% in the second year, 10% in the third year, and 5% in the fourth year. Starting from the fifth year, the company will maintain the dividend growth rate to be 5% per year forever. How much is Stock X worth today if its equity cost of capital is 10%? With clear calculation and formula
Assume that the average firm in C&J Corporation's industry is expected to grow at a constant rate of 4% and that its dividend yield is 8%. C&J is about as risky as the average firm in the industry and just paid a dividend (DO) of $2. Analysts expect that the growth rate of dividends will be 50% during the first year (g0,1 = 50%) and 20% during the second year (g1,2 = 20%). After Year 2, dividend growth will be constant at 4%. What is the required rate of return on C&J's stock? What is the estimated intrinsic price per share? Do not round intermediate calculations. Round the monetary value to the nearest cent and percentage value to the nearest
a. Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year? b. Determine the net proceeds, N, that the firm will actually receive. c. Using the constant-growth valuation model, determine the required return on the company's stock, rg, which should equal the cost of retained earnings, r,. d. Using the constant-growth valuation model, determine the cost of new common stock, r,.

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