Asked by
Ronney Weems
on Oct 19, 2024
Verified
Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A ________.
A) will be higher than the intrinsic value of stock B
B) will be the same as the intrinsic value of stock B
C) will be less than the intrinsic value of stock B
D) The answer cannot be determined from the information given.
Constant-Growth DDM
A version of the dividend discount model that assumes dividends grow at a constant rate indefinitely.
Dividend
Funds disbursed by a corporation to its owners, often from the company's profits, as a profit sharing.
Expected Growth Rate
The predicted percentage increase in the value of an investment, asset, or economy over a certain period of time.
- Study the influence of growth rates on dividends and how it affects the pricing of stocks in the market.
- Apply the principles of the Constant-Growth Dividend Discount Model to ascertain the price of a stock in a scenario with consistent growth.
- Leverage the Capital Asset Pricing Model (CAPM) to pinpoint the necessary rate of return.
Verified Answer
PG
Learning Objectives
- Study the influence of growth rates on dividends and how it affects the pricing of stocks in the market.
- Apply the principles of the Constant-Growth Dividend Discount Model to ascertain the price of a stock in a scenario with consistent growth.
- Leverage the Capital Asset Pricing Model (CAPM) to pinpoint the necessary rate of return.