FIN-515- Managerial Finance Week 4_Stock and Stock Valuation_Discussion_Question_1_Answer

Apr 24th, 2015
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FIN-515- Managerial Finance Week 4_Stock and Stock Valuation_Discussion_Question_1_Answer

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Stock and Stock Valuation (graded) What are the Legal Rights and Privileges of Common Stockholders? Stock prices are the discounted value of future cash flows. For which type of company would the constant growth model be appropriate to value that company's stock price?The Gordon Growth Model is also called the Constant Growth Model. It is a model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. Stock Value = D / Rs - GD = Expected dividend per share one year from nowRs = Required rate of return for equity investorG = Growth rate in dividends (in perpetuity) Because the model simplistically assumes a constant growth rate, it is generally only used for mature companies (or broad market indices) with low to moderate growth rates. understanding of the constant growth model is that it would be appropriate for mature companies with low to moderate growth rates. My reasoning behind this is based on the fact that the model assumes the constant growth rate. As a result of this there is expected dividends per share payable in one year, required rate of return for equity investor, and growth rate in the dividends. Therefore

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