The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 11 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax return

The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 11 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax return

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 7 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 40 percent. Gecko has an expected earnings growth rate of 16 percent annually, and its stock price is expected to grow at this same rate. If the aftertax expected returns on the two stocks are equal (because they are in the same risk class), what is the pretax required return on Gordon's stock? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Pretax return %
The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 11 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon’s stock?
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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. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]
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Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 2% forever. Its stock price is $38.7 and its beta is 1.7. The risk-free rate is 2% and the expected return on the market portfolio is 8%. What is the best guess for the cost of equity? Recall that both Dividend Growth Model and CAPM can be used to find cost of equity. Here assume the best guess is the simple average of the two.
NewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk-free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model (CAPM) to estimate NewLinePhone's cost of retained earnings. (*You must show your calculation process as well.)
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. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]
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A firm uses a target payout ratio of 0.49. In recent years, its earnings per share (EPS) has been $4.22 and using that EPS, it has just paid its annual dividend of $2.07 per share. One year from now, the firm expects its EPS to increase to $4.97 but does not believe that the entire increase in its earnings is permanent. It intends to select its dividend amount according to the Lintner model, using a speed of adjustment coefficient of 0.62. Question content area bottom Part 1 Part A: What dividend will the firm issue in one year?Dividend in one year: $enter your response here per share. (Enter your answer rounded to two decimal places and use the rounded value in Part B).Part B: If the EPS remains at its higher value for an additional year, what dividend will the firm issue in two years?Dividend in two years: $enter your response here per share. (Enter your answer rounded to two decimal places).
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. [Note: you are supposed to show every step of your calculation and interpret the result.] b) Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]

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