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.
1. What is the stock's value?
2. 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?
3. 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?
4. Why is risk aversion so important to financial decision making?
The solution computes stock value of California Clinic under different circumstances ans answer why risk aversion is important to decision making.