i need help with question 2
1. Gordon Dividend Growth Model Basic (answered by all students) A. The company OldCe has a current stock price of $210 per share. Last year they paid an annual dividend of $10 per share. Historically the dividend growth was 5% per year; the next dividend payment will be $10.50. What is the discount rate implied by this firm? B. A competitor NewCo enters the market (same good, same technology, same market). The company says they do not plan to pay a dividend for the first five years. Instead, they plan to use the cash to make strategic acquisitions into new businesses. The company says they will pay a dividend at the end of year 6 of $20 and then grow the dividend by 5% a year. What is the present value of New Ce using the discount rate of OldCo? C. What does the "bird in the hand theory" say about dividends and how does it apply to the analysis of these companies? 2. Gordon Dividend Growth Model Advanced (optional) D. The Federal Reserve begins an aggressive policy of lowering interest rates. Perform a comparative statics analysis of the change in the valuation of OldCo as the discount rate declines? Does the valuation increase or decrease as r is lowered? Does a 1% decline in the rate have a constant impact on the value of the company? E. The Modigliani Miller Theorem says that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed." (Wikipedia) OldCo has debt, and the debt service cost interest on the debt) declines as the interest rate falls, Lower costs would seem to raise the value of the company. Is this consistent with your comparative statics analysis? This seems to contradict the Modigliani Miller theorem. Explain why there is not a contradiction between the Gordon Dividend Growth Model and the Modigliani Miller theorem. F. What is the value of the company when the discount rate is 4%? This value is strange. Explain the economics of this result