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?
Stock value does not have a constant value. The value fluctuates based on the number of factors which includes dividends, investment growth, and the conditions of economy and financial markets. The stock value is $21.00.
E(P0)= $2.00x 1.05 = $2.10 = $21.00
2. Suppose the riskiness of the stock ...view middle of the document...
Investment opportunities state that if the business is highly profitable, then the business would be able to pay creditors a higher interest rate than if it is barely profitable. With time preferences for consumption, a potential lender may be saving money from retirement or pension and it able to loan funds at a relatively low rate because their preference is for future consumption. Others may loan funds out from current income, and forgo consumption, only if the interest rate is very high. The risk intrinsic in the forthcoming home health care business, and thus in the ability to repay the loan, would also affect the return lenders would require: the higher the risk, the higher the interest rate. Investors would be unwilling to lend to high-risk businesses unless the interest rate was higher than on loans to low-risk businesses. Finally, because the value of money in the future is affected by inflation, the higher the expected rate of inflation, the higher and the interest rate demanded by savers (Gapenski, 2008, p. 342).
5. Why is risk aversion so important to financial decision making?
Risk aversion is important for the most part because both individual and business investors dislike risk. First, given two investments with similar returns but different risk, investors will favor the lower-risk alternative. Second, investors will require higher returns on higher-risk investments. These behavioral outcomes...