California Clinics
To find out the stock's value with the information provided, the Gordon Growth Model would be used. The Gordon Growth Model is used to determine the price of a stock if the dividend, dividend growth rate and discount rate are all known. The underlying assumption behind the Gordon Growth Model is that the stock price is based on the expected future dividends -- investors are only investing for the known future cash flows. As a result, only the dividend and the discount rate are taken into account, along with the expected future growth rate of the dividend. Capital gains are not taken into account in the Gordon Growth Model.
The formula for the Gordon Growth Model is as follows:
Source: Investopedia (2011)
Thus, $2 / (.15-.05) = P
P = $
The stock's value if the riskiness of the stock changes would be calculated with the same formula, changing k to reflect the new risk level of the stock:
Thus, $2 / (.13-.05) = P
P = $
The stock's value if the growth rate of the dividend changes would be calculated with the same formula, changing G. To reflect the new level of dividend growth:
Thus, $2 / (.15 - .07) = P
P = $25
4. The cost of money is affected by a number of different factors. Production opportunities are one key factor in the cost of money. In an environment characterizes by slumping demand, such as the U.S. In the past few years, the demand for money will decrease. This is because firms do not feel that there are as many opportunities that will pay off. Lenders must lower rates in order to stimulate borrowing, by bringing more projects to a level where they will have a positive net present value. Conversely, if the economy is experiencing a period of strong growth and there are a lot of investment opportunities, the cost of money will be higher. Basically, the supply of money might not be high enough to meet the demand for it -- the Federal Reserve will usually restrict supply so that the economy does not become overheated -- and this drives the cost of money upward because so many companies are...
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Another possibility is to allow companies to convert traditional defined-benefit pensions, which encourage retirement as early as age 55, to cash-balance plans, which have no built-in incentives to retire. Perhaps the most controversial idea is to break the typical link between pay and seniority. As more people work into their late 60s and 70s, pay should be adjusted to match how much people work and what they accomplish on
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