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California Clinics

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California Clinics
Lakisha Fields
Strayer University
Instructor: Laura Forbes
HSA 525
February 12, 2012

California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. Hint: consult pages 396-397 of your text book for correct formula. Please consult your syllabi for assignment grading criteria.

1. What is the stock’s value?
In order to determine the stock’s value. I used the formula in the text E(P0)= D0 x [1 + E(g)] / R(Re) – E(g).
In which D0 represents the most recent dividend, which has already been paid = $, E(g) represents the expected growth rate in dividends in the future=5%, and R(Re) represents the expected rate of return on the stock=15%. Therefore the formula is as follows:
E(P0)= $2.00 x [1 + .05] / .15 - .05=
E(P0)=$2.00 x 1.05 / .10=
E(P0)= $2.10 / .10= $21.00
The stock’s value is $21.00

2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value?
The formula used above would again be used in this situation, however the R(Re) which represents the expected rate of return on the stock now=13%. Therefore the formula is now as follows:
E(P0)= $2.00 x [1 + .05] / .13 - .05=
E(P0)=$2.00 x 1.05 / .08
E(P0)= $2.10 / .08= $26.25
The stock’s value is $26.25 3. Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value?
The formula used above would again be used in this situation, however the E(g) which represents the expected growth rate in dividends in the future is now increased to=7%. Therefore the formula is now as follows:
E(P0)= $2.00 x [1 + .07] / .15 - .07=

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