Question
Asked Dec 2, 2019
4 views

Question 3
XYZ company has just paid a dividend of $1.15. The required rate of return on the stock is 13.4%, and investors expect the dividend to grow at a constant 8% in the future.
a) Calculate the current stock value using the Gordon Constant growth model.
b) Evaluate Gordons growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results?

check_circle

Expert Answer

Step 1

a) Given:

D0 = $1.15

r = 13.4%

g = 8%

Step 2

Using Gordon growth model, price of the sock today is

help_outline

Image Transcriptionclose

Do(1+g) r-g $1.15(1+0.08) 0.1340-0.08 $1.242 0.054 -$23

fullscreen
Step 3

Answer: Current stock...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Equity Valuation

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Maggie’s Skunk Removal Corp.’s 2015 income statement listed net sales = $12.5 million, gross profit ...

A: Calculation of Profit Margin, Gross Profit Margin, Operating Profit Margin, ROA and ROE:The profit m...

question_answer

Q: Before making capital budgeting decisions, finance professionals often generate, review, analyze, se...

A: Option 1 and 2 are correct.Correct options:The discounted payback period improves on the regular pay...

question_answer

Q: I have 3 questions I'm working on and need help. They build on the first question. I need help to or...

A: With the values given in the question, we need to determine the value of the stock. We will follow t...

question_answer

Q: You have assigned the following values to these three firms:     Price   Upcoming Dividend   Grow...

A: The formula to calculate required return using CAPM model is given below:

question_answer

Q: critically discuss the Langtry Falls Expansion Plan and evaluate the issues in the Langtry benchmark...

A: Langtry Fall Expansion Plan:It is a case study which is introduced by Harvard Business Review (HBR) ...

question_answer

Q: Your company is considering a new project that will require $825,000 of new equipment at the start o...

A: Calculation of PV of Tax Benefits from Depreciation:The PV of tax benefits from depreciation is $141...

question_answer

Q: Karen and Mike pay $700 and $900 a year on seperate insurance. If they used same company save 10%. W...

A: Calculate the annual savings as follows:

question_answer

Q: 8. A credit card company determines a card holder's minimum monthly payment by adding all new intere...

A: a.) Computation:Hence, the minimum due as on December 1st is $34.55.

question_answer

Q: Solve the problems. 2. You want to buy a sectional sofa that costs $5300 by saving money in your sav...

A: When a fixed amount is paid at regular interval then annuity is calculated.