California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm's dividend is expected to grow at a constant rate of 5% per year, and investors require a 15% rate of return on the stock.
What is the stock's value?
PO = D 1 / ( KS - G )
P PO = Price
D1 = The next dividend. D1 = D0 (1 + G)
KS = Rate of Return
G = Growth Rate=D1/(Ks-G)
P = 2.10 / (15% - 5%)
P = $
Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock's value?
P = 2.10 / (13% - 5%)
P = $26.25
Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value?
= 2 * 1.07 = 2.14
P = 2.14 / (15% - 7%)
P = $26.75
4.
Explain how each...
That is, it is costly in a way to hold cash because there is a certain opportunity cost attached to it; the value of the cost is driven by several different factors. Productive opportunities represent one such factor because if production opportunities are plentiful then this puts upward pressure on the demand for capital and consequently also puts upward pressure on interest rates. Time preferences for consumption also affect the supply and demand for investment capital because if you are interested in consumption in the short-term then you value holding cash more thus driving up the cost of money.
Risk also affects the cost of money. If there is little risk, such a treasury bill or government…
California Clinics To find out the stock's value with the information provided, the Gordon Growth Model would be used. The Gordon Growth Model is used to determine the price of a stock if the dividend, dividend growth rate and discount rate are all known. The underlying assumption behind the Gordon Growth Model is that the stock price is based on the expected future dividends -- investors are only investing for the
All other factors being equal, an investor will seek to maximize return for equivalent risk levels. This means that the investor will choose the investment that offers the best risk-return ratio. It is believed that for the most part, investors tend towards risk aversion. Often, decisions are made under conditions of uncertainty, and in this situation they will use perceived risk as their guidepost rather than objective risk, as