Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value. Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate , and intrinsic value of the stock. It tells us about the growth of the investment.

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Answer 1

Question

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

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Which 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.

Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 36.5%, and the current dividend yield is 8.50%. Its beta is 1.33, the market risk premium is 14.50%, and the risk-free rate is 2.70%. a. Use the CAPM to estimate the firm's cost of equity. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Now use the constant growth model to estimate the cost of equity. Note: Do not round intermediate calculations. Enter your answer as a whole percent. c. Which of the two estimates is more reasonable? a. Cost of equity % % c. Which of the two estimates is more reasonable? b. Cost of equity

Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity % c. Which of the two estimates is more reasonable?

Answer 2

Question

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Expert Solution & Answer

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Answer 3

Question

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 4

Question

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 5

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Answer 6

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

Answer 7

Chapter 18, Problem 6CP

A

Summary Introduction

To calculate: Dividend growth rate using Gordon growth model assuming that the firm’s current stock price of $58.49 equals intrinsic value.

Introduction: The dividend growth rate is depends on the dividend value, growth rate, return rate, and intrinsic value of the stock. It tells us about the growth of the investment.

Answer 8

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Answer 9

B

Summary Introduction

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 18 - Prob. 1PS Ch. 18 - Prob. 2PS Ch. 18 - Prob. 3PS Ch. 18 - Prob. 4PS Ch. 18 - Prob. 5PS Ch. 18 - Prob. 6PS Ch. 18 - Prob. 7PS Ch. 18 - Prob. 8PS Ch. 18 - Prob. 9PS Ch. 18 - Prob. 10PS

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To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

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Chapter 18 Solutions

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To select: Appropriateness of the Gordon growth model for common stock. Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.

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Chapter 18 Solutions

To select: Appropriateness of the Gordon growth model for common stock.

Introduction : In common stock, the dividend value and earning is not increasing at same rate. Thus dividend value should be kept constant and earnings are increases.