# Stock valuation minicase We can increase the price of the stock by issuing more dividends. Obviously, it would not be feasible to deal with an infinite stream of dividends, but fortunately, an equation has been developed that can be used to find the PV of the dividend stream, provided it is growing at a constant rate.

What would the stock price be if its dividends were expected to have zero growth?

What is a constant growth stock? Directors hire management who attempt to maximize stock price. Of course, the difficulty in this framework is estimating the short-term growth rate, how long the short-term growth will hold, and the long-term growth rate. There are some special scenarios when the Gordon DCF constant growth model will not make sense, which will be discussed later. We can get the answer with the formula we have used above. What is the price-earnings ratio for Ragan, Inc.? Questions: 1. Is this the relationship you would expect between the two ratios? In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price. Then, we must estimate a constant long-term growth rate that the firm is expected to grow at. What would the stock price be if its dividends were expected to have zero growth? What is its expected dividend yield and capital gains yield in Year 1? In addition to assuming a constant growth rate, we will be estimating a long-term required return for the stock. When we calculate the constant growth dividends, we solve for a terminal value or a continuing value as of the horizon date. In this equation, the long-run growth rate g can be approximated by multiplying the firm's return on assets by the A B C D E H I retention ratio.

Questions: 1. In addition to assuming a constant growth rate, we will be estimating a long-term required return for the stock.

Assume that Temp Force has a beta coefficient of 1. What is the expected rate of return on the stock? In the long run i. What is the industry average price-earnings ratio? However, considering the implications of imperfect information, information asymmetry, and general uncertainty, perhaps our assumption of constant growth is reasonable.

We can get the answer with the formula we have used above.

Then we will treat all dividends to be received after the convention of constant growth rate with the Gordon constant growth model described above. By assuming constant growth, we are trying to find the average of the good times and the bad times, and we assume that we will see both scenarios over the firm's life. Although Ragan, Inc. He believes the industry average required return is more appropriate. Common Stock represents ownership 2. Stockholders elect directors 4. Generally speaking, the long-run growth rate of a firm isFlikely to fallG between 5 and 8 percent a 71 year. Questions: 1. That simplification comes in the form of valuing stocks on the premise that they have a constant growth rate. They are co-directors of the company's pension fund management division, with Strother having responsibility for fixed income securities primarily bonds and Tibbs being responsible for equity investments. Now, we are charged with the purpose of finding a valuation model that is easier to predict and construct. What is a constant growth stock? Like many small business owners, they want to retain control of the company, but they do not want to sell stock to outside investors.

Hence, valuation for these companies proves a little more complicated. The original partnership agreement between the siblings gave each 50, shares of stock. It implies that the value of the stock price of Ragan, Inc will get lower because of the lower growth rate.

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