California_ClinicsA - California Clinics, an investor-owned...

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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. 1. What is the stock’s value? Stock value does not have a constant value. The value fluctuates based on the number of factors which includes dividends, investment growth, and the conditions of economy and financial markets. The stock value is $21.00. $2.00 D0 5% E (g) 15% R (Rs) $21.00 E (P0) = $2.00x 1.05 = $2.10 = $21.00 0.15-0.05 0.1 2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? There are numerous financial risk factors within the stocks and marketing industry. If the stock decreased rate of return fell to 13%, the stock value would be: E (P0) = $2.00x 1.05 = $2.10 = $26.25 0.13-0.05 .08; the stock value would be $26.25.
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3. Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value? Dividend growth investing is a lesson in the power of compounding returns. The
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This note was uploaded on 08/20/2011 for the course HSA 525 taught by Professor Dr.forbes during the Spring '10 term at Strayer.

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California_ClinicsA - California Clinics, an investor-owned...

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