Investors require an 8% rate of return on Mather Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $3.75 and investors expect dividends to grow at a constant annual rate of (1) -7%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ (2) $ (3) $ (4) $
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.
Investors require an 8%
-
What is its value if the previous dividend was D0 = $3.75 and investors expect dividends to grow at a constant annual rate of (1) -7%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
(1) $
(2) $
(3) $
(4) $
- Using data from part a, what would the
Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Round your answers to the nearest cent. If the value is undefined, enter N/A.(1) $
(2) $
Are these reasonable results?
- 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.
- These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate.
- These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate.
- 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.
- 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.
- Is it reasonable to think that a constant growth stock could have g > rs?
- It is not reasonable for a firm to grow indefinitely at a rate equal to its required return.
- It is not reasonable for a firm to grow indefinitely at a rate higher than its required return.
- It is reasonable for a firm to grow indefinitely at a rate higher than its required return.
- It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.
- It is not reasonable for a firm to grow indefinitely at a rate lower than its required return.
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