Assignment #3 � California Clinics

Assignment #3 � California Clinics - Assignment #3...

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Assignment #3 – California Clinics 1 California Clinics Teresa Escarsega Dr. Laura Forbes HSA 525 21 November, 2010
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California Clinics 2 California Clinics California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. Stock valuation based on earnings starts out with an assumption that each dollar of earnings per share of a company is really worth one actual dollar of income to the stockholder. To find the value of a stock, calculation of all future earnings needs to be done, to infinity, and then use own desired rate of return as a discount rate to find their present value. The infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be willing to pay. The following will show what the California Clinics stock value is using a constant growth stock valuation. A constant growth stock is a stock whose dividends are expected to grow at a constant rate in the foreseeable future. Some use "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to: $2.00 Do Last dividened payment 5% E(g) Expected growth rate 15% R(Rs) Required rate of return $21 $200*.05/.15-.05 = 21 In a second scenario, supposing the riskiness of the stock decreases, which causes the required rate of return to fall to 13%, the stock value under these conditions would be as follows.
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Assignment #3 � California Clinics - Assignment #3...

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