Roland Corporation's stock recently paid a dividend of $2.50 per share (D0=$2.50). The company has a constant growth rate of 5% and a beta equal to 1.5. The rate of return on the market portfolio is 15%, and the risk-free rate is 7% a) Calculate Roland Corporation's discount rate ad current stock price. b) Roland is considering a change in policy that will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the price of Roland stock to remain unchanged? Please solve above questions using the formula in the image. If possible please explain in detail so that i can understand for my upcomming test. Thank you in advanced
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.
Roland Corporation's stock recently paid a dividend of $2.50 per share (D0=$2.50). The company has a constant growth rate of 5% and a beta equal to 1.5. The
a) Calculate Roland Corporation's discount rate ad current stock price.
b) Roland is considering a change in policy that will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the price of Roland stock to remain unchanged?
Please solve above questions using the formula in the image. If possible please explain in detail so that i can understand for my upcomming test. Thank you in advanced!
![Available formulas:
F
E(r)= WE(rs) + (1 - w)rf
Po
D₁
k-9
E()=rf +
E(rs)- Ifo
ős
E(r₁) — rf = ß;[E(rm) – rf]
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