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April 20, 2014

Homework Help: Finance

Posted by Ashley on Monday, May 7, 2012 at 12:59pm.

A person is considering buying the stock of two home health companies that are similar in all respects except the proportion of earnings paid out in dividends. Both companies are expected to earn $6 per share in the coming year, but company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or $2 per share. The companies are equally risky, and their required rate of return is 15%. Ds constant growth rate is zero and Gs is 8.33 percent. What are the intrinsic values of stocks D & G?

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