Valuation of Common

Dividend and Gordon Model Application

1) You estimate a company’s earnings and dividends will grow at a constant rate of 4% and want to determine the value of the stock. The company paid a dividend yesterday of $7 per share. The current10 year treasury rate is 2.3%, and the company’s beta is .6. Given market conditions, you estimate a required return on the market of 10%.

2) If your estimate of earnings and dividend growth rate changes to 6% per year, what will your estimated stock value be?

3) If your estimate of earnings and dividend growth rate changes to 2% per year, what will your estimated stock value be?

4) If interest rates rise and the 10 year treasury yields 2.7% and the required return on the market increases to 10.4%, what will your estimated stock value be? (Assume a 2% constant growth rate in earnings and dividends.)

5) If interest rates fall, and the 10 year treasury yields 2% and the required return on the market falls to 9.7%, what will your estimated stock value be? (Assume a 2% constant growth rate in earnings and dividends.)

6) If investors grow more risk averse and the required return on the market increases to 12%, what will your estimated stock value be? (Assume a 2% constant growth rate in earnings and dividends and a 2%10 year Treasury yield.)