Question

In: Finance

Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%). What...

Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%).

  1. What is its value if the previous dividend was D0 = $3.00 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 4%, or (4) 12%? Do not round intermediate calculations. Round your answers to two decimal places.

    (1) $

    (2) $

    (3) $

    (4) $

Solutions

Expert Solution

The question is solved using the dividend discount model.

1.Information provided:

Current dividend= $3.00

Required rate of return= 17%

Growth rate= -2%

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of stock today= $3*(1 -0.02)/ 0.17 + 0.02

                                = $2.94/ 0.19

                                = $15.47.

Therefore, the value of the stock at -2% growth rate is $15.47.

2.Information provided:

Current dividend= $3.00

Required rate of return= 17%

Growth rate= 0%

The question is solved using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of stock today= $3*(1+ 0)/ 0.17 – 0

                                = $3/ 0.17

  = $17.65.

Therefore, the value of the stock at 0% growth rate is $17.65.

3.Information provided:

Current dividend= $3.00

Required rate of return= 17%

Growth rate= 4%

The question is solved using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $3*(1 + 0.04)/ 0.17- 0.04

                                      = 3.12/ 0.13          

  =$24

Therefore, the value of the stock at 4% growth rate is $24.

4.Information provided:

Current dividend= $3.00

Required rate of return= 17%

Growth rate= 12%

The question is solved using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $3*(1+0.12)/ 0.17 – 0.12

                                     = $3.36/ 0.05

                                     = $67.20.

Therefore, the value of the stock at 12% growth rate is $67.20.

In case of any further queries, kindly comment on the solution.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%). What...
Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%). What is its value if the previous dividend was D0 = $3.00 and investors expect dividends to grow at a constant annual rate of (1) -7%, (2) 0%, (3) 3%, or (4) 12%? Do not round intermediate calculations. Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon (constant growth) model...
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What...
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $    (2) $    (3) $    (4) $   
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What...
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $3.50 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 2%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return...
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What...
Investors require an 8% rate of return on Levine Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $1.50 and investors expect dividends to grow at a constant annual rate of (1) -4%, (2) 0%, (3) 2%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $   (2) $   (3) $   (4) $   Using data from part a, what would the Gordon (constant growth) model...
Investors require a 7% rate of return on Mather Company's stock (i.e., rs = 7%). What...
Investors require a 7% rate of return on Mather Company's stock (i.e., rs = 7%). What is its value if the previous dividend was D0 = $2.00 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 3%, or (4) 5%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $   (2) $   (3) $   (4) $   Using data from part a, what would the Gordon (constant growth) model...
Investors require a 7% rate of return on Mather Company's stock (i.e., rs = 7%). What...
Investors require a 7% rate of return on Mather Company's stock (i.e., rs = 7%). What is its value if the previous dividend was D0 = $1.75 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 5%? Do not round intermediate calculations. Round your answers to the nearest cent. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return...
Investors require an 8% rate of return on Mather Company's stock (i.e., rs = 8%). What...
Investors require an 8% rate of return on Mather Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $1.75 and investors expect dividends to grow at a constant annual rate of (1) -4%, (2) 0%, (3) 2%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon (constant growth) model...
Investors require a 6% rate of return on Mather Company's stock (i.e., rs = 6%). a....
Investors require a 6% rate of return on Mather Company's stock (i.e., rs = 6%). a. What is its value if the previous dividend was D0 = $2.00 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 2%, or (4) 5%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ (2) $ (3) $ (4) $ b. Using data from part a, what would the Gordon (constant...
eBook Problem Walk-Through Investors require an 8% rate of return on Mather Company's stock (i.e., rs...
eBook Problem Walk-Through Investors require an 8% rate of return on Mather Company's stock (i.e., rs = 8%). What is its value if the previous dividend was D0 = $4.00 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 7%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $   (2) $   (3) $   (4) $   Using data from part a, what would the Gordon...
VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's...
VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's stock (i.e., rs = 16%). What is its value if the previous dividend was D0 = $3.25 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 4%, or (4) 11%? Do not round intermediate calculations. Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT