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Accounting

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1.) Common stock valuation: Negative growth Ray Steel Company is a mature

manufacturing company. The company just paid a $5 dividend and management

wants to cut future dividends, reducing them by 2% each year indefinitely. If you

require an 8% return on this stock, how much will you pay for it?

 

 

 

 

 

 

 

2.) Common stock valuation: Constant growth Sweet Candy will pay a dividend of

$0.72 next year. The CEO of the company declared that the company will maintain

a constant growth rate of 7% per year every year from now on.

a. How much will you pay for the stock if your required return is 10%?

b. How much will you pay for the stock if your required return is 8%?

c. Based on your answer in parts a and b, give one disadvantage of the constant

growth model.