The price of the common stock Concept Introduction: The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Question

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Answer 1

Question

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

EBK ECONOMICS OF MONEY, BANKING AND FIN, Chapter 7, Problem 1LO , additional homework tip 1

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

EBK ECONOMICS OF MONEY, BANKING AND FIN, Chapter 7, Problem 1LO , additional homework tip 2

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

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The problem statement never defines whether the loan had compound or simple interest. The readings indicate that the diference in those will be learned later, and the formula used fro this answer was not in the chapter. Should it be assumbed that a simple interest caluclaton should be used?

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Answer 2

Question

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

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Answer 3

Question

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

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Answer 4

Question

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

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Answer 5

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

Answer 6

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)

where

D₁= dividend given by the corporation at the end of the year

P₀₌ Current value of the stock P₁= the expected sales price of the stock

K_e= The required return on equity

The Generalized Dividend Valuation Model

where

D_n= dividend given by the corporation at the end of n periods

P₀₌ current price of a stock

P_n= Price of stock after n-periods

K_e= the required return on equity

The Gorden-Growth Model

This model estimated the price of the stock when corporations strive to give regular dividend at regular interval of time.

D₀₌the most recent dividend paid

G= the expected constant growth rate in dividends

K_e₌the required return on an investment in equity

Answer 7

Chapter 7, Problem 1LO

To determine

The price of the common stock

Concept Introduction:

The Common stock is the security which is issued by corporations to raise capital. Usually, people who purchase such securities are called stockholder. They are paid a dividend as income

Answer 8

Expert Solution & Answer

Explanation of Solution

There are various models to determine the price of a common stock. These are as follows:

The one-period valuation Model

Under this model, the price of the stock is calculated only for a year period, i.e., an investor keeps a stock only for a year period.

To value the stock today, the present discounted value of the expected cash flow(future payment) is calculated. The cash flow consists of dividend payment and sale price.

P0=D1(1+ke)+P1(1+ke)