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California Clinics

In: Business and Management

Submitted By flowering
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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.

A B

$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 as follow:

E(P0)= $2.00x 1.05 = $2.10 = $26.25

0.13-0.05 .08

The stock value would be $26.25.

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 chart equation below shows the new stock value with an increase of dividend growth rate.

A B

$2.00 D0

7% E(g)

15% R(Rs)

$21.00

E(P0)= $2.00x 1.07 = $2.14 = $21.40

0.15-0.05 0.1

Assuming that the dividend rate increased to 7%, the stock value jumped from $21.00 to $21.40. This is a 0.40 increase.

4. Explain how each of the four (4) fundamental factors that affect the supply and demand for investment capital, and hence, interest rates, (namely productive opportunities, time preferences for consumption, risk, and inflation) affects the cost of

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