Finance

Identify factors that affect dividend discount models

1.

Discuss four factors that influence dividend discount models and briefly explain how each either, cause stock prices to increase or decrease.

i.

Risk Premiums

ii.

Growth rate in dividends or EPS

iii.

Level of Future Dividends

iv.

Discount Rate

Trait 2

Discuss basic stock valuation using zero-growth, constant growth, and variable-growth model

a. What would be the maximum an investor should pay for the common stock of a firm that has no

growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly

1 year and remain the same thereafter. The required rate of return is 12.5%.

Topic: Zero Growth Valuation Model (15 points)

b. Nico Corporation’s common stock currently sells for $180 per share. Nico just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Nico Corporation’s stock sell for one year from now?

Topic: Constant Growth Valuation Model

c. Jia’s Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia’s Fashions common stock sell for today if her required return is 10.5%?

Topic: Variable Growth Valuation Model

Trait 3

Discuss free cash flow valuation model, book value, and price/earnings multiple to estimate a firms value.

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