Question

As an investor you have a required rate of return of 12 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information is Firm ABCCurrent dividends $1.00 $3.00 $7.50Expected annual growth rate in dividends 7% 2% (-1%)Current market price $23 $33 $60aWhat is your valuation of each stock using the dividend-growth model?

Answer 1

Answer:

Explanation:

Expected annual growth rate in dividends 7%

Dividend growth Model= Pv=Do(1+g)/Ke-g

present value = 1(1+7%) / 12%-7%

present value =1.07 /5%

present value =21.4

Expected annual growth rate in dividends 2%

Dividend growth Model= Pv=Do(1+g)/Ke-g

present value = 1(1+2%) / 12%-2%

present value =1.02 /10%

present value =20.4

Expected annual growth rate in dividends -1%

Dividend growth Model= Pv=Do(1+g)/Ke-g

present value = 1(1+(-1)%) / 12%-2%

present value =0.99/10%

present value =7.69