The company has paid a dividend of $1.20 which is expected to grow continuously at a rate of 2.5% in perpetuity. The required rate of return on the stock is 15%. Gordon constant growth model is used to determine the value of a stock. The model assumes that the dividend paid by the company would continue to grow at a constant rate in the foreseeable future. The present value of all these dividends paid till perpetuity is the market or present value of the stock. The model also assumes that the required rate of return of the stock should always be greater than the growth rate, otherwise, the value would become negative and meaningless. Value of the stock when the dividends are growing at a constant rate is P 0 = D 1 r s − g = D 0 ( 1 + g ) r s − g w h e r e , D 1 = dividend paid next year D 0 = dividend paid this year r s = required rate of return g = growth rate of dividend in perpetuity

Question

Want to see the full answer?

Answer 1

Question

Chapter 7, Problem 8PROB

Summary Introduction

The company has paid a dividend of $1.20 which is expected to grow continuously at a rate of 2.5% in perpetuity. The required rate of return on the stock is 15%.

Gordon constant growth model is used to determine the value of a stock. The model assumes that the dividend paid by the company would continue to grow at a constant rate in the foreseeable future. The present value of all these dividends paid till perpetuity is the market or present value of the stock. The model also assumes that the required rate of return of the stock should always be greater than the growth rate, otherwise, the value would become negative and meaningless.

Value of the stock when the dividends are growing at a constant rate is

P0=D1rs−g=D0(1+g)rs−gwhere,D1=dividend paid next yearD0=dividend paid this yearrs=required rate of returng=growth rate of dividend in perpetuity

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Do you think moves like this could potentially backfire by reducing community access or hurting brand reputation, even if they improve financial performance in the short term? How should companies like Walgreens balance cost-cutting with maintaining customer reach?

Do you think companies like Kohl's can recover investor confidence more effectively by focusing on operational improvements, or is a broader shift in business strategy (such as digital transformation or restructuring) more likely to make an impact in the long run?

3. After discussing things with a bank, the family learned that they can (1) refinance the remaining $15 comma 400 amount on the vehicle 1 at 13%, over 4 years, (2) refinance the remaining $8500 loan amount on the vehicle 2 at 13%, over 3 years, (3) refinance the remaining $119 comma 900 loan amount on their home at 5%, over 25 years, and (4) reduce their car insurance payments by $30 per month. Complete the following table. (Round to the nearest cent as needed. Do not include the $ symbol in your answer.) Part 9Part 10Part 11Part 12Part 13Part 14 Item Current Loan Amount New Interest Rate New Term of Loan New Monthly Payment Motor vehicle 1 $ enter your response here enter your response here% enter your response here years $ enter your response here Motor vehicle 2 $ enter your response here enter your response here% enter your response here years $ enter your response here Home $ enter your response here enter your response here%…