Question
1. Records Inc. is a firm that archives computer records of numerous business firms to save them computer space and yet allow easy retrieval. The
1. Records Inc. is a firm that archives computer records of numerous business firms to save them computer space and yet allow easy retrieval. The firm has one million common shares outstanding. The growth rate for Records Inc. is six percent and analysts expect it to remain constant for the foreseeable future. The last dividend paid (Dividendyear0) was $0.80. Investors require a 14 percent rate of return.
a. What is the current value or price of Record's stock?
b. What is the expected dividend yield?
c. What is the expected capital gain yield?
d. What is the expected total rate of return?
e. Why do we refer to each of the components in parts b, c and d as expected values?
f. What is the common stock price one year from now?
g. What is the expected dividend yield one year from now?
h. What is the expected capital gain yield one year from now?
i. What is the expected total rate of return one year from now?
j. If the growth rate were 8 percent instead of 6 percent what would be the value of Record's stock?
k. If the growth rate were as originally stated (6 percent) but the required rate of return increased from 14 percent to 16 percent what would be the value of Records stock?
l. Assume the required rate of return is back to its original value of 14 percent and the growth rate is still constant at 6 percent. If the last dividend paid (Dividendyear0) had been $1.00 instead of $0.80 what would be the value of Records stock?
m. What are the two necessary conditions for the Constant Growth Model to work?
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