FIN 419 Week 3 Chapter 7 P7–6 Common stock valuation – Zero growth Scotto Manufacturing is a

FIN 419 Week 3 Chapter 7 P7–6 Common stock valuation – Zero growthScotto Manufacturing is a

FIN 419 Week 3 TUTORIAL

FIN 419 Week 3 SOLUTION

FIN 419 W3 C7 P7–6 Common stock valuation – Zero growth

University of Phoenix

FIN 419: Finance for Decision making

Chapter 7 P7–6

Common stock valuation – Zero growthScotto
Manufacturing is a mature firm in the machine tool component industry.
The firm’s most recent common stock dividend was $2.40 per share.
Because of its maturity as well as its stable sales and earnings, the
firm’s management feels that dividends will remain at the current level
for the foreseeable future.

a.If the required return is 12%, what will be the value of Scotto’s common stock?

b.If the firm’s risk as
perceived by market participants suddenly increases, causing the
required return to rise to 20%, what will be the common stock value?

c.Judging on the basis of your findings in parts aand b,what impact does risk have on value? Explain.