1632 Words7 Pages

Case 78
QUESTIONS
1. A. Based on the constant growth rate or Gordon Model, what was James Rivers price at the beginning of 1995?
$20.98
B. What conditions must hold to use the constant growth model? Do many real world stocks satisfy the constant growth assumption?
Dividends, earnings, sales, and assets must grow at the same constant rate with a constant payout are conditions that must hold to use the constant growth model. Not all real world stocks satisfy the constant growth assumptions, the model is generally used only for mature companies with low to moderate growth rates.
2. The Wall Street Journal lists the current price of James River common stock at $27 A. Based on this information, the Value Line 1995 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 expected capital gains yield? Explain the difference in the required return estimates from the Value Line to the WSJ price data.
The company’s return on common stock using the constant growth model is 7.72%
Expected dividend yield = .60/27= 2.22% Cap. Gains Yield=5.5%
The expected returns decreased from 8.36%to 7.72% which indicates the company is not as risky because the higher the risk the higher the return.
B. What is the relationship between dividend yield and capital gains yield over time under constant growth assumptions?
Under constant growth assumptions, the relationship between the dividend yield and capital gains yield is they both remain constant.
3. A successful joint venture is expected to result in the 4.0% growth rate until 2000 but would increase the company’s normal growth to a constant 8% after that time. The joint venture is also expected to increase investors required return to 9.5% A.

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