2. 2: stecks and Their Valuation: Discovnted Dividend Model The value of a share of common stock depends bn the cash flows k is expected to previde, and thote fioms consat of the dividends the investor receives each year while holding the atock and the price the inveter recelves when the stock is cold. The final price includes the oniginal price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equifiblum occurs ahen the stock's price is its intrime velue. If the stock mekket is rebsonably efficen, dfierences between the stock price and intrinsic value should noe be very larpe and they thould not persist for very long. When invecting in commen stocks, an investor's goul is to purchase stocks that are undervalued (the price is the stock's intrinse value) and bwid tocks that are ovecvalued The value of a stock todey can be catoulated as the present value of stream of divend: Valueofstoek=P^n=(1+k2)+D2+(1+r2)D1++(1+cn)2D2=i=1(1+r4)D4 This is the qeneralied stock valuation model. We will now look ot 3 sefferent situatiens ahere we can adopt this gererelized model to euch of these sifuations to determine at stock's intrinse value 1. Constant Growth 5t0dx 2. Zere crever steds 3. Nonconstant Croeth stidis Contant civenth sheck: For manr comparies as is reawonabe to predut that disendt wal grow at a constant cote, wo we can rewrite the generalized model as follewi: coestant in the future. This cendtion eimok never hodes for _firms, lut in does ceist for many compenies. 3. The grewth rete a rere. 1. The prevech rote is eegetive. c. The reoured rate of retum is greater than the growth rate. d. The requiped rate of return is more than sow. 4. Sose of the above animpheed woda involdate the model. curcent prot of Hubbards cemman stock? Oo hot round intermediate calculations, Round your answer to the nearest cent. 4. per share Rere cronth Stock: The cenvant growth mosel is nuffoenty generai to handle the case of a zere growth stock, where the dividend is erpectad to remain constank cver time. in this situation, the equabon isi P0=41 phenets in peripetuly the viluaton esuation in whoty the curent divend divised br the required rate of return prefered vod. what is the price of the fimilis oeretuel oreferred stok? nound your antwer to the rearest cent. per these of all tidendi espected therenter. per shere