Question

In: Finance

The dividend-growth model may be used to value a stock:Round your answers to the nearest...

The dividend-growth model may be used to value a stock:

Round your answers to the nearest cent.

  1. What is the value of a stock if:
    D0 = $2.40
    k = 8%
    g = 5%

  2. What is the value of this stock if the dividend is increased to $4.00 and the other variables remain constant?

  3. What is the value of this stock if the required return declines to 6.5 percent and the other variables remain constant?

  4. What is the value of this stock if the growth rate declines to 4 percent and the other variables remain constant?

  5. What is the value of this stock if the dividend is increased to $3.10, the growth rate declines to 4 percent, and the required return remains 8 percent?

Solutions

Expert Solution

The value of the stock is computed as follows:

= [ D0 x (1 + growth rate) ] / (k - g)

a. The value is computed as follows:

= [ $ 2.40 x 1.05 ] / (0.08 - 0.05)

= $ 2.52 / 0.03

= $ 84

b. The value is computed as follows:

= [ $ 4 x 1.05 ] / (0.08 - 0.05)

= $ 4.2 / 0.03

= $ 140

c. The value is computed as follows:

= [ $ 2.40 x 1.05 ] / (0.065 - 0.05)

= $ 2.52 / 0.015

= $ 168

d. The value is computed as follows:

= [ $ 2.40 x 1.04 ] / (0.08 - 0.04)

= $ 2.496 / 0.04

= $ 62.4

e. The value is computed as follows:

= [ $ 3.10 x 1.04 ] / (0.08 - 0.04)

= $ 3.224 / 0.04

= $ 80.60

jeff jeffy answered 2 years ago
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