Justifiable price of common stock


Question 1: How should Jonathan describe the rationale of the dividend discount model (DDM) and demonstrate its use in calculating the justifiable price of common stock?

Question 2: Being a researcher, Dwayne asked Jonathan a key question, "How did you estimate the growth rates used in applying the model?" Using the data giving in Tables 1 and 2 explain how Jonathan should respond.

Question 3: What is the rationale of the required rate of return that Jonathan used and how did he estimate it?

Question 4: "What other variations of the DDM can one use and Why?" asked Dwayne. What should Jonathan respond be?

Question 5: "Why are you using dividends and not earning per share, Jonathan?" asked Dwayne. What do you think Jonathan would have said?

Question 6: Dwayne wondered whether pharmcopia's preferred stock would be a better investment than its common stock, given that it was paying a dividend of $1.50 and trading a price of $15. He asked Jonathan to explain to him the various features of preferred stock, how it differed from common stock and corporate bonds, and the method that could be used for estimating its value.


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