Asked Dec 2, 2019

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?


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


Image Transcriptionclose

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

Step 3

Answer: Current stock...

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