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Calculating the constant growth rate in the given case

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You've recently learned that the company where you work is being sold for $550,000. The company's income statement indicates current profits of $24,000, which have yet to be paid out as dividends. Assuming the company will remain a "going concern" indefinitely and that the interest rate will remain constant at 7 percent, at what constant rate does the owner believe that profits will grow?

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Current price of company=Po=$550,000
Current profit of company=Current Dividends=Do=$24,000

Let ...

Solution Summary

Solution depicts the steps to estimate the constant growth rate in the given case.

$2.19
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Lama Case Study: Stock Dividend, Price, Management, Growth Rate

Assume that Lama's stock has a beta of 1.6 while the risk-free rate is 10% and the mean return on the market is 15%.

a. If the dividend expected during the coming year is $2.50 and the growth rate is a constant 5%, what is the equilibrium price for Lana's stock?

b. Now suppose the Federal Reserve Board increases the money supply causing the risk-free rate to drop to 9% holding everything else constant, how would Lana's stock be affected?

c. In addition to the change in part(b), suppose investors' risk aversion declines; this fact combined with the decline in the risk-free rate causes the market return to fall to 13%, what should the price of Lana's stock now be?

d. Now suppose Lama has a change in management. The new team institutes policies that increase the growth rate to 6% as well as enhance revenues and profits so that the beta coefficient declines from 1.6 to 1.3. After implementing these changes and assuming that the expected dividend now increases to $2.52, what impact would this have on Lana's share?

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