Question

What would the CAT stock value be if the constant growth rate were 5% instead of 4%? (The current dividend and the required rate of return are the same as in the previous example, $4.50 and 9.72%, respectively.) $______ (Hint: the growth rate, g, affects both the numerator and the denominator.)

Answer 1

When the growth rate is adjusted to 5% instead of 4% for CAT stock, using the dividend of $4.50 and the required rate of return of 9.72%, the stock value is calculated to be approximately $95.34.

Step-by-step explanation:

The CAT stock value if the growth rate were 5% instead of 4% can be calculated using the Gordon Growth Model, otherwise known as the Dividend Discount Model (DDM). This model states that the value of a stock is the present value of all future dividend payments when they are assumed to grow at a constant rate indefinitely. Based on the given current dividend ($4.50) and the required rate of return (9.72%), the formula to calculate the stock price is:

Stock Price = Dividend per Share / (Required Rate of Return - Growth Rate)

Plugging the values into the formula yields:

Stock Price = $4.50 / (0.0972 - 0.05) = $4.50 / 0.0472 = approximately $95.34

Therefore, if the growth rate were 5%, the CAT stock value would be approximately $95.34.