Stocks and Their Valuation: Discounted Dividend Model
This is the generalized stock valuation model. We will now look at 3 different situations where we can adapt this generalized model to each of these situations to determine a stock's intrinsic value:
1. Constant Growth Stocks;
2. Zero Growth Stocks;
3. Nonconstant Growth Stocks.
Constant Growth Stocks:
Which of the following assumptions would cause the constant growth stock valuation model to be invalid?
a. The growth rate is zero.
b. The growth rate is negative.
c. The required rate of return is greater than the growth rate.
d. The required rate of return is more than 50%.
e. None of the above assumptions would invalidate the model.
-Select-Statement: a Statement b Statement c Statement d Statement e Statement
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.30. It expects to grow at a constant rate of 2% per year. If investors require a 12% return on equity, what is the current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round intermediate calculations.
$______ per share
Zero Growth Stocks:
Quantitative Problem 2: Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.00 at the end of each year. If investors require an 8% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to the nearest cent. Do not round intermediate calculations.
$_______ per share
Nonconstant Growth Stocks:
Quantitative Problem 3: Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.40 per share at the end of 2013. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (rs) is 9%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.
$_____ per share