Question

What is the value of a common stock if a. the firm's earnings and dividends are growing annually at 20 percent, the current dividend is $2.64, and investors require a 15 percent return on investments in common stock? b. What is the value of this stock if you add risk to the analysis and the firm's beta coefficient is 0.8, the risk-free rate is 9 percent, and the return on the market is 15 percent? c. If the price of the stock is $35, what is the rate of return offered by the stock? Should the investor acquire this stock? Explain your answer

Answer 1

Summary:

As per the Gordon Growth Model, the companies sholdnt have the growth rate > than investor required rate of retrun. While evaluating using the constant growth model the price of the share is in negative whcih means that these companies are not oriented to pay more dividends rather they reinvest in their company itself. But in the case C the price of share is 35 and the required rate of return in 29%> growth rate, Here the investor can buy the stock where as in the cases A,B he/she shouldn't.