38 Cengage x C Chegg Study | Guix C Finance question | x & Aplia: Student Que XM

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38 Cengage x C Chegg Study | Guix C Finance question | x & Aplia: Student Que XM 48 Hours Only Flax Check Out - Sams xé How to take a ser ex® Stock Valuation - fx Casey + C & O courses.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz;_probGuid=RCPLCOA801010000003b5e0520110000&ctx;=nhverton-0041&ck;=m_1511240969743_OAA. T & e 0 : VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of retum on Levine Company's stock (i.e., is - 15%). a. What is its value if the previous dividend was Do = $3.50 and investors expect dividends to grow at a constant annual rate of (1) -4%, (2) 0%, (3) 74%, or (4) 14%? Do not round intermediate calculations. Round your answers to two decimal places. (1) $ (2) $1 (3) $ (4) $ b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of retum was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? 1. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate. II. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate. III. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return. IV. These results show that the formula does not make sense i the required rate of retum is equal to or less than the expected growth rate. V. These results show that the formule does not make sense if the required rate of return is equal to or greater than the expected growth rate. -Select-4 C. Is it reasonable to think that a constant growth stock could have g > !g? 1. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return. II. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return. III. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return. IV. It is reasonable for a firm to grow indefinitely at a rate higher than its required return. V. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required retum. Select- Grade It Now Save & Continue Continue without saving session Timeout 59:32

Explanation / Answer

a)Here D0 = 3.5$, Ke = 15%

Price of stock = D1/ke-g

D1= dividend of next year g = growth rate

Where g = -4%

Po = 3.5(1+g)/15%-(-4%)

=3.5(1-0.04)/15%+4%

=3.5(0.96)/19%

3.36/19%

=17.68$

Where g = 0%

Po = 3.5(1+g)/15%-(0%)

=3.5(1+0)/15%

=3.5(1)/15%

3.5/15%

=23.33$

Where g = 7%

Po = 3.5(1+g)/15%-(7%)

=3.5(1-0.07)/15%-7%

=3.5(1.07)/8%

3.745/8%

=46.8125$

Where g = 14%

Po = 3.5(1+g)/15%-(14%)

=3.5(1-0.14)/15%-14%

=3.5(1.14)/1%

3.99/1%

=399$

b) where g = 15% or 20%, the denominator in our formula will become 0 , hence calculating price is nor possible, thus

IV) These results shows that formula does not make sense if the required rate of return is equal to or less than expected growth rate

C) it is not reasonabe for the firm to grow indefinately at a rate higher than its required rate because it is not possible , if that happens than company would be riskless arbitrage and will attract all the money in the world which is not possible

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