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Residual income model; correlation between stocks; expected price of stock

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Question # 1
Apply the residual income model to determine the intrinsic value of the stock for a firm with the financial data shown in this table.

Question #2
Calculate the correlation between Stock A and Stock B.

Question #3
A stock just paid a dividend of $2.00. Due to the introduction of a proprietary product, the dividend growth rate is expected to be 30 percent for the next two years, 15 percent for years 3 and 4, and then return to a constant growth rate assumption of 4 percent thereafter. The required return on the stock is 18 percent. Calculate the current expected price of the stock.

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Solution Summary

This solution explores financial concepts such as residual income model, stock correlation and expected price.

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Question #1

Apply the residual income model to determine the intrinsic value of the stock for a firm with the financial data shown in this table.

Current Assets $15,000,000.00
Fixed-Assets $65,000,000.00
Total Assets $80,000,000.00

Current Liabilities $10,000,000.00
Long-Term Debt $50,000,000.00 Answer: We ...

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  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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