Mike Brandreth, an analyst who specializes in the electronics industry, is preparing a research report on Dynamic
Question:
Mike Brandreth, an analyst who specializes in the electronics industry, is preparing a research report on Dynamic Communication. A colleague suggests to Brandreth that he may be able to determine Dynamic’s implied dividend growth rate from Dynamic’s current common stock price, using the Gordon growth model. Brandreth believes that the appropriate required rate of return for Dynamic’s equity is 8%.
a. Assume that the firm’s current stock price of $58.49 equals intrinsic value. What sustained rate of dividend growth as of December 2010 is implied by this value? Use the constant-growth dividend discount model (i.e., the Gordon growth model).
b. The management of Dynamic has indicated to Brandreth and other analysts that the company’s current dividend policy will be continued. Is the use of the Gordon growth model to value Dynamic’s common stock appropriate or inappropriate? Justify your response based on the assumptions of the Gordon growth model.
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
a The formula for the Gordon model is Where D 0 dividend paid at time of valuation g annual growth r...View the full answer
