Question #$6$: Stock Valuation $[20$ Points$]$

Suppose Exelon Corporation $($stock symbol: EXC$)$ is expected to pay a $$1\mathrm{.}44$ dividend at the end of this

year $(d_1=1\mathrm{.}44).$ Additionally, suppose that your required rate of return on holding this stock is $11\mathrm{.}5\%.$

$($a$)$ Using a one$-$period model of stock price determination, what is the maximum amount you would be

willing to pay for a share of EXC if you expect to sell it next year for $$20\mathrm{.}40?[5$ Points$]$

$($b$)$ Using the Gordon Growth Model, what would you pay for a share of EXC if you expect the dividends

to grow at a rate of $5\%$ per year? $[5$ Points$]$

$($c$)$ Suppose that you had a meeting with the CFO $($chief financial officer$)$ of Exelon Corporation and you

were so unimpressed with the CFO that you consider the company to be of higher risk than you

previously thought, and so you increase your required rate of return on this equity investment to $13\mathrm{.}5\%.$

Using the Gordon Growth model, what would you now pay for a share of EXC? $[4$ Points$]$

$($d$)$ Suppose that at your meeting with the CFO of Exelon Corporation, she provided you with inside

information that the dividends were going to grow at a slower rate of $3\%$ per year. Using the Gordon

Growth Model, if your required return on this equity investment remains at $13\mathrm{.}5\%,$ what price would you

pay for the stock? $[4$ Points$]$

$($e$)$ Based on your answers from Parts $($b$)-($d$),$ for a given dividend payment, what happens to the price

of a stock if required rate of return increases? What happens to the price of a stock if the growth rate of

dividends decreases? $[2$ Points$]$