Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Question
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Chapter 7, Problem 7.1STP

a.

Summary Introduction

To determine: The value of the common stock if the growth rate is 0.00% to infinity.

a.

Expert Solution
Check Mark

Answer to Problem 7.1STP

The value of the common stock if the growth rate is 0.00% to infinity is $15.00.

Explanation of Solution

Given information:

Required rate: 12.00%

Annual dividend: $1.80

Formula used to calculate the stock price if the growth rate is 0.00% to infinity.

Stockprice=AnnualdividendRequiredrate

Calculation of the stock price:

Stockprice=AnnualdividendRequiredrate=$1.8012.00%=$15.00

Therefore, the stock price is $15.00.

b.

Summary Introduction

To determine: The value of the common stock if the growth rate is 5.00% to infinity.

b.

Expert Solution
Check Mark

Answer to Problem 7.1STP

The value of the common stock if the growth rate is 5.00% to infinity is $27.00.

Explanation of Solution

Given information:

Required rate: 12.00%

Annual dividend: $1.80

Growth rate: 5.00%

Formula used to calculate the stock price

Stockprice(P0)=Annual year-end dividend×(1+Growth)RequiredrateGrowth

Calculation of the stock price if the growth rate is 5.00% to infinity:

Stockprice(P0)=Annual year-end dividend×(1+Growth)RequiredrateGrowth=$1.80(1+5.00%)12.00%5.00%=$1.897.00%=$27.00

Therefore, stock price is $27.00.

b.

Summary Introduction

To determine: The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity.

b.

Expert Solution
Check Mark

Answer to Problem 7.1STP

The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity is $24.03.

Explanation of Solution

Calculation of the stock price:

Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance), Chapter 7, Problem 7.1STP , additional homework tip  1

Excel working:

Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance), Chapter 7, Problem 7.1STP , additional homework tip  2

Therefore, stock price is $24.03.

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Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)

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