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

Assignment #3 – California Clinics
1
California Clinics
Teresa Escarsega
Dr. Laura Forbes
HSA 525
21 November, 2010

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.