Calculating required rate of return, present value, stock price

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The last dividend that was paid yesterday (D0) on a Corporation's common stock was $8.00, and the expected growth rate is 0 percent. The required rate of return on this stock is 10 percent.

1. What is the present value of the future growth opportunity represented by the 5% growth rate, compared to 0% growth rate?

2. What is the highest price you should be willing to pay for this stock?

3. Suppose the firm's expected growth rate is 5% now, what is the price of the stock?
Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.

4. Assume the constant growth rate is 5%. What is the stock price at time 1, i.e., one year from today? Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.

Solution Preview

The last dividend that was paid yesterday (D0) on a Corporation's common stock was $8.00, and the expected growth rate is 0 percent. The required rate of return on this stock is 10 percent.

1. What is the present value of the future growth opportunity represented by the 5% growth rate, compared to 0% growth rate?

The PVGO is the difference in price (which is the present ...

Solution Summary

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