P724 ETHICS PROBLEM Melissa is trying to value Generic Utility, Inc.s, stock, which is clearly not growing
Question:
P7–24 ETHICS PROBLEM Melissa is trying to value Generic Utility, Inc.’s, stock, which is clearly not growing at all. Generic declared and paid a $5 dividend last year. The required rate of return for utility stocks is 11%, but Melissa is unsure about the financial reporting integrity of Generic’s finance team. She decides to add an extra 1%
“credibility” risk premium to the required return as part of her valuation analysis.
a. What is the value of Generic’s stock, assuming that the financials are trustworthy?
b. What is the value of Generic’s stock, assuming that Melissa includes the extra 1% “credibility” risk premium?
c. What is the difference between the values found in parts a and
b, and how might one interpret that difference?
Step by Step Answer:
Principles Of Managerial Finance
ISBN: 9780133546408
7th Edition
Authors: Lawrence J Gitman, Chad J Zutter