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.
1. What is the stock’s value?
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
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?
4. Explain how each of
the four (4) fundamental factors that affect the supply and demand for
investment capital, and hence, interest rates, (namely productive
opportunities, time preferences for consumption, risk, and inflation)
affects the cost of money.
5. Why is risk aversion so important to financial decision making?
6. Explain the three (3) techniques for solving time value problems.