UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT PROBLEM 9 California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $5.80 per share. The firm's dividend is expected to grow at a constant rate of 6.2 percent per year, and investors require a 20 percent rate of return on the stock. a. What is the stock's value? ANSWER b. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 15 percent. Under these conditions, what is the stock's value? c. Return to the original 20 percent required rate of return. Assume that the dividend growth rate estimate is increased to a constant 8 percent per year. What is the stock's value? Chapter 7- Equity Financing a. E(PO) = D0 [(1 + E(g)] = R(Rs) - E(g) Spreadsheet solution: DO E(g) R(Rs) E(PO) b. With a lower required rate of return, the value of the stock increases: E(PO)= D0 [(1 + E(g)] = R(Rs) - E(g) Spreadsheet solution: DO E(g) R(Rs) E(PO) c. Now, with the original required rate of return but with an increased growth rate, the value of the stock again increases: E(PO)= D0 [(1 + E(g)] = R(R$) - E(g) Spreadsheet solution: DO E(g) R(Rs) E(PO)

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