If mcas dividends are expected to grow at a constant rate

Question

Topic: Healthcare Finance Problems

Problem 1 - Medical Corporation of America (MCA) has a current stock price of $36, and its last dividend (D₀) was $2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years?

Problem 2 - Assume that a risk-free rate is 6 percent and the market risk premium is 6 percent. The stock of Physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D₀) was $2 per share.

a. What would PCN's stock value be if the dividend were expected to grow at a constant:

• -5 percent?
• 0 percent?
• 5 percent?
• 10 percent?

b. What would be the stock value if the growth rate were 10 percent but PCN's beta fell to:

• 1.0
• 0.5