Chapter 7 Review

# Chapter 7 Review - 8.75 D 0 = \$3.75 g = 5.5 k cs = 8.75...

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* Chapter 7 Review  Common Stock:  Gordon Growth Model Constant Growth Model: Assumes common stock dividends will grow at a  constant rate into the future. D 1 :  the dividend at the end of period 1.  [D 1 D 0 *(1+g)] k cs :  the required return on the common stock. g:  the constant, annual dividend growth rate * Remember:  Sustainable Growth = g* = ROE x (1-b) Falcon stock recently paid a  \$3.75 dividend The dividend is expected to  grow at 5.5%  per year indefinitely.    What would we be willing to pay if our  required return  on Falcon stock is  8.75% ? Falcon stock recently paid a  \$3.75 dividend .  The dividend is  expected to  grow at 5.5%  per year indefinitely.    What would we be willing to pay if our  required return  on Falcon  stock is

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Unformatted text preview: 8.75% ? D 0 = \$3.75 g = 5.5% k cs = 8.75% Value = PV(Stage 1) + PV(Stage 2) Stage 1 : PV of super-normal dividends (“estimation period”). Process: calculate and find the PV of each super-normal dividend. Stage 2: PV of normal dividends (a growing perpetuity starting after the super-normal period). Process: Use GGM Formula: Due to a research development, earnings and dividends in Carlisle Corp are expected to grow at a rate of 21% for the next 4 years . After this period, the firm is expected to grow at the industry average rate of 4.25% forever. The firm recently paid a dividend of \$1.45 and the required return is 10%....
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Chapter 7 Review - 8.75 D 0 = \$3.75 g = 5.5 k cs = 8.75...

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