Fundamentals of Corporate Finance Standard Edition with Connect Plus
10th Edition
ISBN: 9780077630706
Author: Stephen Ross
Publisher: MCG
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Chapter 8, Problem 38QP
Summary Introduction
To determine: The first stage of growth rate (
Introduction:
Two-stage dividend growth model is used to determine the value of stock. This model is used to express on the two stages of growth. The first stage of growth will have a high growth rate and second stage has a constant growth rate.
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6. Expected returns, dividends, and growth
The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows:
Pˆ0P̂0
= =
D1(rs – g)D1(rs – g)
Which of the following statements is true?
Increasing dividends will always increase the stock price.
Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources.
Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.
Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return?
704.91%
656.87%
13.82%
992.14%…
13
The value of the stock:
Group of answer choices
Increases as the required rate of return increases
Increases as the dividend growth rate increases and increases as the required rate of return decreases
Increases as the dividend growth rate increases
Increases as the required rate of return decreases
Mf2.
1. Consider the data in the following table for a hypothetical two-stock version of the Dow Jones Industrial Average.
a) Calculate the percentage change in the index value.
b) Suppose firm XYZ from part (a) were to split two for one during the period (price drops to $35 immediately after the split and the new final price is $30). Calculate the percentage change in the index value.
c) If this was for S&P500-type index, what is the percentage change in the index value? Is it affected by the stock split of firm XYZ?
Chapter 8 Solutions
Fundamentals of Corporate Finance Standard Edition with Connect Plus
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Does the value of a share of stock depend on how...Ch. 8.1 - What is the value of a share of stock when the...Ch. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.2 - Why is preferred stock called preferred?Ch. 8.3 - Prob. 8.3ACQCh. 8.3 - Prob. 8.3BCQCh. 8.3 - How does NASDAQ differ from the NYSE?Ch. 8 - A stock is selling for 11.90 a share given a...
Ch. 8 - An 8 percent preferred stock sells for 54 a share....Ch. 8 - Prob. 8.3CTFCh. 8 - Stock Valuation [LO1] Why does the value of a...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Dividend Growth Model [LO1] Under what two...Ch. 8 - Common versus Preferred Stock [LO1] Suppose a...Ch. 8 - Prob. 6CRCTCh. 8 - Growth Rate [LO1] In the context of the dividend...Ch. 8 - Prob. 8CRCTCh. 8 - Prob. 9CRCTCh. 8 - Prob. 10CRCTCh. 8 - Prob. 11CRCTCh. 8 - Two-Stage Dividend Growth Model [LO1] One of the...Ch. 8 - Prob. 13CRCTCh. 8 - Price Ratio Valuation [LO2] What are the...Ch. 8 - Prob. 1QPCh. 8 - Prob. 2QPCh. 8 - Prob. 3QPCh. 8 - Prob. 4QPCh. 8 - Prob. 5QPCh. 8 - Prob. 6QPCh. 8 - Prob. 7QPCh. 8 - 8. Valuing Preferred Stock [LO1] Lane, Inc., has...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Prob. 13QPCh. 8 - Prob. 14QPCh. 8 - Prob. 15QPCh. 8 - Prob. 16QPCh. 8 - Prob. 17QPCh. 8 - Prob. 18QPCh. 8 - Prob. 19QPCh. 8 - Prob. 20QPCh. 8 - Prob. 21QPCh. 8 - Prob. 22QPCh. 8 - Prob. 23QPCh. 8 - Prob. 24QPCh. 8 - Prob. 25QPCh. 8 - Prob. 26QPCh. 8 - Prob. 27QPCh. 8 - Prob. 28QPCh. 8 - Prob. 29QPCh. 8 - Prob. 30QPCh. 8 - 31. Stock Valuation and PE [LO2] Plush Pilots,...Ch. 8 - Prob. 32QPCh. 8 - Prob. 33QPCh. 8 - Prob. 34QPCh. 8 - Prob. 35QPCh. 8 - Prob. 36QPCh. 8 - Two-Stage Dividend Growth [LO1] Regarding the...Ch. 8 - Prob. 38QPCh. 8 - Prob. 1MCh. 8 - Prob. 2MCh. 8 - Prob. 3MCh. 8 - Prob. 4MCh. 8 - Prob. 5MCh. 8 - Prob. 6M
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- The dividend-Growth model may be used to value a stock: V= D0 (1+g) / k-g What is the value of a stock if : D0 = $2 k = 10% g = 6% What is the value of this stock if the dividend is increased to $3and the other variables remain constant? What is the value of this stock if the required return declines to 7.5 percent and the other variable remains constant? What is the value of this stock if the growth rate declines to 4 percent and the other variables remain constant? What is the value of this stock if the dividend is increased to $2.30, the growth rate declines to 4 percent, and the required return remains 10 percent?arrow_forwardQuestion 3XYZ 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?arrow_forwardCase Study 1. Should stockholder wealth maximization be thought of as a long-term or a short-term goal?For example, if one action increases a firm’s stock price from a current level of P40 to P45in 6 months and then to P50 in 5 years but another action keeps the stock at P40 forseveral years but then increases it to P70 in 5 years, which action would be better?arrow_forward
- The dividend-growth model may be used to value a stock: Round your answers to the nearest cent. What is the value of a stock if:D0 = $5.00k = 12%g = 6% $ What is the value of this stock if the dividend is increased to $6.50 and the other variables remain constant? $ What is the value of this stock if the required return declines to 11 percent and the other variables remain constant? $ What is the value of this stock if the growth rate declines to 3 percent and the other variables remain constant? $ What is the value of this stock if the dividend is increased to $6.50, the growth rate declines to 3 percent, and the required return remains 12 percent? $arrow_forwardSubject: Financial strategy & policy Question No 3 (part i) Answer the following. i) The future earnings, dividends, and common stock price of Nabeel Inc. are expected to grow 7% per year. Common stock currently sells for $23.00 per share; its last dividend was $2.00. a) Using the DCF approach, what is its cost of common equity? b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm’s cost of common equity using the CAPM approach? c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs? d) If you have equal confidence in the inputs used for the three approaches, what is your estimate of cost of common equity?arrow_forwardD3) An analyst gathers the following data: · Expected rate of return on the market = 14% · Current Dividend = $2 · Growth rate in dividends = 6% per year · Risk Free Rate = 8% · Expected rate of return on stock X if you buy at current price = 16% · Stock X’s beta = 1.25 Using this data, is this stock underpriced or overpriced and by how much (in % return).arrow_forward
- the dividend growth model may be use to value a stock v=Do(1+g) k-g a. what is the value of a stock if: Do=$2 k==10% g=6% b. what is the value of this stock if the dividend is increased to $3 and the other variables remain constant? c. what is the value os this stock if the required return decline to 7.5 percent and the other variables remain constant? d. what is the value of this stock if the growth rate declines to 4 percent and the other variables remin constant? e. what is the value of this stock if the dividend is increased to $2.30, the growth rate declines to 4 percent, and the required return remains 10 percent?arrow_forwardInfinite growth is a problem with the dividend discount model because: Seleccione una: a. Dividend growth rates eventually become very small b. The statement is incorrect as infinite growth is not a problem with the dividend discount model because at reasonably high discount rates, such as 12 percent, dividends received in the distant future are worth very little today c. The expected stream of dividends is infinite d. At reasonably high discount rates, such as 12 percent, dividends received in the distant future (40 or 50 years from now) are worth very little todayarrow_forwardThe dividend-growth model may be used to value a stock: Round your answers to the nearest cent. V=D0(1+g) / k-g What is the value of a stock if:D0 = $2.50k = 10%g = 6% $ What is the value of this stock if the dividend is increased to $4.40 and the other variables remain constant? $ What is the value of this stock if the required return declines to 7.5 percent and the other variables remain constant? $ What is the value of this stock if the growth rate declines to 4 percent and the other variables remain constant? $ What is the value of this stock if the dividend is increased to $3.20, the growth rate declines to 4 percent, and the required return remains 10 percent? $arrow_forward
- Company DELTA has just paid a dividend of $1.15. The required rate if return on the stock is 13.4% and investors expect the dividend to grow at a constant rate of 8% in the future. a)Calculate the current stock value using the Gordon Constant growth model. b)Evaluate Gordon growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results?arrow_forwardRound your answers to the nearest cent. What is the value of a stock if:D0 = $2.10k = 10%g = 7% $ What is the value of this stock if the dividend is increased to $3.80 and the other variables remain constant? $ What is the value of this stock if the required return declines to 8 percent and the other variables remain constant? $ What is the value of this stock if the growth rate declines to 5 percent and the other variables remain constant? $ What is the value of this stock if the dividend is increased to $3.10, the growth rate declines to 5 percent, and the required return remains 10 percent? $arrow_forward12.2 Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: Factor Beta Expected Value Actual Value GDP .0000734 $19,571 $19,843 Inflation -.90 2.6% 2.7% Interest Rates -.32 3.4% 3.2% What is the systematic risk of the stock return? Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on…arrow_forward
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY