1. Exploring Finance: Constant Growth Stock Constant Growth Stock Conceptual Overview: Explore how the value of a stock changes as a function of the discount interest rate. and an anticipated The blue stair-step line depicts the value of future stock dividends. The orange stein-step line depicts the present value of those future dividends discounted by tg for a stock with initial dividend Do = $1. growth rate of g = 4%. Use the slider to changers and observe the corresponding changes in the equilibrium price of the stock. D.(1+) $1.15(1+0.04) = $29.90 0.08-0.04 Po = E-PVD, = - Dividend (51) 20 1.5 10- 0.5 5 10 15 20 Years rs = 8 5 10 15 20 Created hy Gary H. McClelland, Professor Emeritus University of Colorado Houlder Cengage Learning. All Rights Reserved. 1. If rs increases to 10%, what would be the value of the constant growth stock? (Note: Do is $1.15 and the expected constant growth rate g = 4%.) a. $29.90 b. $19.93 C. $10.87 d. Undetermined -Select- 2. When rs increases from, say, 8% to 10%, the value of the constant growth stock: a. Increases because the interest rate is higher. b. Decreases because its dividends are being discounted at a higher rate. C. Remains the same because it is a "constant growth" stock. d. Might either increase or decrease. -Select- 3. Move the slider that rs is 12%. If the stock were selling on the market for $15.50 would you it? Do is $1.15 and the pect rowth consstant rate g = 4%.) a. Yes, it is a bargain. b. No, the stock is overvalued, as the expected stock price is only $14.95. c. Not enough information to determine whether it would be a good buy. -Select- 4. The slider for rs is limited to a minimum of 4.1% so that rs is always greater than g. Move the slider to the minimum and observe how the present value of the stock changes. Must rs be greater than g? a. No reason is needs to be greater than g because the formula adjusts the value of the stock appropriately. b. Yes, because if rs were not greater than g, then the graph would be too large to display easily. C. Yes, because if rs = 9, then the formula divides by zero, producing an infinite value. -Select