Constant Growth Stock 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 Do = $1.15 and an anticipated growth rate of g = 4%. Use the slider to changers and observe the corresponding changes in the equilibrium price of the stock. Po = - PVD, Do(1+9) $1.15(1+0.04), = $29.90 Ps 8 0.08 0.04 Dividend (51) 25 20 1.5 10- 0.5 0.0 0 15 1. If ry increases to 10%, what would be the value of the constant growth stock? (Note: Do is $1.15 and the expected constant growth rate 9 - 4%.) a. $29.90 b. $19.93 C 510.87 d. Undetermined -Select- 2. When is 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. a . d. Might either increase or decrease. Select 3. Move the slider so that is is 12%. If the stock were selling on the market for $15.50, would you buy a? (Note: Do is $1.15 and the expected growth constant 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. a Not enough information to determine whether it would be a good buy 4. The slider for rs is limited to a minimum of 4.1% so that is is always greater than g. Move the slider to the minimum and observe how the present value of the stock changes. Must is be greater than 92 a. No reason to needs to be greater than g because the formula adjusts the value of the stock appropriately. b. Yes, because if is were not greater than g, then the graph would be too large to display easily. C. Yes, because if is-9, then the formula divides by zero, producing an infinite value. Select