Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 1CP
a.
Summary Introduction
To evaluate: The director’s statement based on constant-growth
Introduction:
Constant-growth dividend discount model: This model is created by Mr. Gorden. This is also called as “Gorden growth model”. According to this model, it is assumed that the company exists forever and will pay dividends per share with an increase at a constant rate.
b.
Summary Introduction
To evaluate: The change in sustainable growth rate and growth in book value due to an increase in dividend payout.
Introduction:
Sustainable growth rate: It is supposed to be maximum rate of growth that a company can sustain without a growth in finance through debt or equity.
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What effect would the calculation performed have in terms of shareholder value? In other words, suppose the company’s goal is to maximize shareholder value. How will the rate of return on equity (increase dividend per share by 1.75) support or inhibit that goal? Be sure to justify reasoning.
Financial managers should aim to maximize the current value per share of the existing stock to:
OF
OD
Oc
increase profitability of the firm
parantee the company will grow in size at the maximum possible rate
increase saves of the firm
Od best represent the interests of the current shareholders
O increase the current dividends per share
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Chapter 18 Solutions
Investments
Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - Prob. 4PSCh. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Prob. 8PSCh. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 5CPCh. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CP
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- Assuming that the required rate of return is determined by the CAPM, explain how you would usethe dividend growth model to estimate the pricefor Stock i. Indicate what data you would need,and give an example of a “reasonable” value foreach data input. How would this be differentif you used free cash flows as the basis for yourevaluation?arrow_forwardWhich of the following statements is CORRECT? a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b. Two firms with the same expected dividend and growth rate must also have the same stock price. c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. provide an explanation for the choice.arrow_forwardNOTE: based on the info given please solve the question .arrow_forward
- The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the corporate valuation model. The market value of a firm is equal to the present value of its expected future free cash flows plus the market value of its non-operating assets: Market value FCF, Market value of company's FCF0 + (1+WACC) FCF2 +...+ of company (1+WACC)! (1+WACC)? non-operating assets Free cash flows are generally forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash flow will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a constant rate, the equation to calculate the continuing value of the firm's operations at that date is: Horizon value = VCompany's operations at t = N= FCFN+1/(WACC-8FCF) Discount the free cash flows back at…arrow_forwardNeed help finding the dividend payout ratio and the dividend yield. Please provide your formula for figuring this out so I am take notes on how to do these kinds of problems.arrow_forwardWhich of the following statements is FALSE of the dividend-discount model Pn= Dn+1/(r-g)? a. The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. b. The value the stock for a firm with rapid or changing growth can be determined just with the dividend-discount model. C. The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever. d. As firms mature, their growth slows to rates more typical of established companies.arrow_forward
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