552 Words3 Pages

Finance 439
Christie Sheats
Guidelines for Beatrice Peabody
1. According to Value line estimates in Figure 1, James River expected annual dividend growth rate from the 91-93 to 97-99 period is 5.5% and the next dividend (1995) is expected to be 0.60c. Assume that the required rate of return for James River was 8.36% on January 1st 1995 and that the 5.50% growth rate was expected to continue indefinitely. Based on the constant growth rate model, what was James River price at the beginning of 1995?
James River’s Price was $20.98 at the beginning of 1995.
What conditions must hold to use the constant growth model? Do many “real world” stocks justify the constant growth assumptions? The dividends grow at a constant rate forever to use the constant growth model. No, many “real world” stocks do not satisfy the constant growth hypothesis because the real world circumstances can be unpredictable and harder to forecast so being able to continually grow your business at a specific rate each year is difficult. 2. The Wall Street Journal lists the current price of James River Current stock at $27. Based on this information, and the Value Line expected dividend, and the annual rate of dividend change for the growth estimate, what is the company’s return on common stock using the constant growth model? What is the expected dividend yield and the expected capital gains yield? Explain the difference in the required return estimates from the value line to the WSJ price data? The expected return is 7.72% The expected dividend yield =2.22% and the capital gains yield is the growth rate of 5.50%. The required return estimates have decreased and the stock price has increased is because it is believed the company has less risk now than it did when the Value Line estimates were released. 3. A successful joint venture is

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