Conceptual Overview: Explore how the value of a stock changes as a function of the discount interest rate. The blue stair-step line depicts the value of future stock dividends. The orange stair-step line depicts the present value of those future dividends discounted by rs for a stock with initial dividend D - $1.15 and an anticipated growth rate of g = 4%. Use the slider to changer, and observe the corresponding changes in the equilibrium price of the stock. $1.15(1+0.04) = $31.47 0.078-0.04 Po = I, PVD, Do(1+2) Dividend ($1) 2.5 20 1.5 1.0 05 ploring Finance Visualizations - Constant Growth Stock 20- 1.5 - 1.0- 0.5 0.0 O 10 15 20 Years rs = 7.8 ch 10 15 20 1. Fr, increases to 10%, what would be the value of the constant growth stock? (Note: D, is $1.15 and the expected constant growth rate 9 - 4%.) a. $29.90 b. $19.93 c. $10.87 d. Undetermined Select 2. When r, 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- v 3. Move the slider so that is 12%. If the stock were selling on the market for $15.50, would you buy it? (Note: Dois $1.15 and the expected growth constant rate 9 -44.) 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. 4. The slider for is limited to a minimum of 4.1% so that is always greater than g. Move the slider to the minimum and observe how the present value of the stock changes. Must be greater than ? a. No reasonry needs to be greater than g because the formula adjusts the value of the stock appropriately. b. Yes, because if, were not greater than , then the graph would be too large to display easily c. Yes, because if r- , then the formula divides by zero, producing an infinite value