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

Pearson eText Economics of Money, Banking and Financial Markets, The, Business School Edition -- Instant Access (Pearson+), 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.

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 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)