What value would an investor place on the stock? Do not round intermediate calculations. Round your answers to 2 decimal places. Horizon (years) 1 2 10 PV (Dividends) 3.18 PV (Terminal Price Value per Share 50 00 53 00 5617 71.90
What value would an investor place on the stock? Do not round intermediate calculations. Round your answers to 2 decimal places. Horizon (years) 1 2 10 PV (Dividends) 3.18 PV (Terminal Price Value per Share 50 00 53 00 5617 71.90
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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Question
Transcribed Image Text:Rework Table 74 for horizon years 1, 2, 3, and 10, assuming that investors expect the dividend and the stock price to increase at only
6% a year and that each investor requires the same 12% expected return. The company will pay a dividend of $3 at the end of the first
year
What value would an investor place on the stock?
Do not round intermediate calculations. Round your answers to 2 decimal places.
Horizon
(years)
1
2
3
10
PV
(Dividends)
$
3.18
PV (Terminal
Price)
Value per
Share
S
50.00
53.00
56.17
71.95
Expert Solution
Step 1: Introduction:
The constant growth model is a stock valuation method used in finance to determine a stock's intrinsic value based on dividends. The model assumes that dividend growth will continue at a steady rate. It might not be appropriate for businesses with unpredictable dividend payout schedules, and the correctness of the model depends on the consistency of the growth rate assumption.
This concept only applies to dividends with a constant growth rate. Or, more precisely, it is only relevant for stocks of companies with stable growth rates in dividends per share.
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