Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 8, Problem 14MC
- (1) Write out a formula that can be used to value any dividend-paying stock, regardless of its dividend pattern.
- (2) What is a constant growth stock? How are constant growth stocks valued?
- (3) What happens if a company has a constant gL that exceeds its rs? Will many stocks have expected growth greater than the required
rate of return in the short run (i.e., for the next few years)? In the long run (i.e., forever)?
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Students have asked these similar questions
Suppose a stock is not currently paying dividends, and its management has announced
that it will not pay a dividend for several years, but that it does expect to start paying
dividends sometime in the future. Under these conditions, which of the following
statements is most correct?
Since it is expected to someday pay dividends, the value of the stock today can be found with this
equation: PO = D1/(r - g).
Under these conditions, we can estimate a value for the stock, but we cannot use any form of the
constant growth DCF model to do so.
Such a stock should have a value of zero until it actually begins paying dividends.
The value of the stock can be found using DCF procedures by finding the present value of
expected future dividends accounting for their timing and amount.
How could you use the nonconstant growth modelto find the value of the stock? Here you can assumethat the expected growth rate starts at a high level,then declines for several years, and finally reachesa steady state where growth is constant.
Which of the following statements is CORRECT?
a.
The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
b.
Two firms with the same expected dividend and growth rate must also have the same stock price.
c.
It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.
d.
If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
e.
The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
provide an explanation for the choice.
Chapter 8 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 8 - Define each of the following terms: a. Proxy;...Ch. 8 - Two investors are evaluating General Electric’s...Ch. 8 - A bond that pays interest forever and has no...Ch. 8 - Explain how to use the free cash flow valuation...Ch. 8 - Thress Industries just paid a dividend of 1.50 a...Ch. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - A company currently pays a dividend of $2 per...Ch. 8 - EMC Corporation has never paid a dividend. Its...
Ch. 8 - Current and projected free cash flows for Radell...Ch. 8 - A stock is trading at $80 per share. The stock is...Ch. 8 - Constant Growth Valuation Crisp Cookwares common...Ch. 8 - Prob. 10PCh. 8 - Brushy Mountain Mining Companys coal reserves are...Ch. 8 - Prob. 12PCh. 8 - Nonconstant Growth Stock Valuation Simpkins...Ch. 8 - Prob. 14PCh. 8 - Return on Common Stock
You buy a share of The...Ch. 8 - Prob. 16PCh. 8 - Value of Operations
Kendra Enterprises has never...Ch. 8 - Free Cash Flow Valuation
Dozier Corporation is a...Ch. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 1MCCh. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Use B&M’s data and the free cash flow valuation...Ch. 8 - Prob. 6MCCh. 8 - Prob. 7MCCh. 8 - Prob. 8MCCh. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 11MCCh. 8 - Prob. 13MCCh. 8 - (1) Write out a formula that can be used to value...Ch. 8 - Assume that Temp Force has a beta coefficient of...Ch. 8 - Prob. 16MCCh. 8 - Now assume that the stock is currently selling at...Ch. 8 - Prob. 19MCCh. 8 - Prob. 20MCCh. 8 - Prob. 21MC
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