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. Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results?

Question
Asked Nov 17, 2019
35 views

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. 

Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results?

check_circle

Expert Answer

Step 1

1.

 

Calculation of Current Stock Value:

 

The current stock value is $21.30.

...
help_outline

Image Transcriptionclose

Current Dividends Current Stock Value = | Re quired Re turn -Growth Rate $1.15 | 13.4%-8% =$21.30

fullscreen

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

Stock Valuation

Related Finance Q&A

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

Q: A stock has had returns of 14 percent, 32 percent, 15 percent, −20 percent, 32 percent, and −7 perce...

A: Calculate the arithmetic average returns as follows:

question_answer

Q: Universal Forest’s current stock price is $64.00 and it is likely to pay a $0.47 dividend next year....

A: Given that the current stock price is $64, expected next year dividend id $0.47 and the growth rate ...

question_answer

Q: wilson's has 10,000 shares of common stock outstanding at a market price of $35 a share. the firm al...

A: Computation of the weighted average cost of capital:Hence, the weighted average cost of capital is 8...

question_answer

Q: Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is...

A: Weighted average cost of capital (WACC) refers to the rate which a firm is expected to  pay to its s...

question_answer

Q: ASDF Corporate Income Statement Current Year Units Sold 100,000 $37.84 $3, 784,000 $1,284,000 Unit P...

A: From the income statement, the following figures can be used to evaluate the degree of combined leve...

question_answer

Q: You are saving for the college education of your two children. They are two years apart in age; one ...

A: Present value of the fees for each of the 2 kids is calculated.Kid 1 (elder kid enters collect after...

question_answer

Q: Problem 10-17 Expected Return Risk (LG10-1)Following are three economic states, their likelihoods, a...

A: Computation of variance:Hence, the variance is 0.06353.

question_answer

Q: The primary instruments used for long-term financing include all of the following except: commercial...

A: Primary instruments:A financial investment where the price depends on the direct market value is kno...

question_answer

Q: The efficiency gains resulting from a just-in-time inventory management system will allow a firm to ...

A: The efficiency gains resulting from a just in time inventory management system will allow  a firm to...