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…