Question

please make the graph.

Benjamin Graham, the father of value investing, once said, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine." In this quote, Benjamin Graham was referring to the key difference between the "price" and the "value" of a security. In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? The intrinsic value of a stock is based only on perceived investor returns. O A stock's market price is often based on investors' perceived risk in the company You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? its growth A company that has been distributing a portion of their earnings every quarter for the past six years The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00 per share and dividends are expected to grow at a constant rate of 4.50% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends Calculate the present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (D10 and D20). Assume that the stock's required return (r) is 5.40%. Note: Carry and round the calculations to four decimal places Time Period Dividend's Expected Expected Dividend's Future Value Present Value Now End of Year 10 End of Year 20 End of Year 50 Using the blue curve (circle symbols), plot the future value of each of the expected future dividends for years 10, 20 and 50. The resulting curve willlustrate how the FV of a particular dividend payment will increase depending on how far from today the dividend is expected to be received Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. You can mouse over the points in the graph to see their coordinates DVIDENDS I$ 10.00 Expected Dividends 8.00 FV of Dividends 6.00 4.00 2.00 PV of Dividends 0.00 0 10 20 30050 60 YEARS

Answer 1

1). A stock's market value is often based on the investors' perceived risk in the company -True

2). Dividend Discount Model would be applicable for a company which has been distributing a portion of their earnings every quarter, for the past six years.

Discount rate (d)	5.40%	growth rate (g)	4.50%
Time period (n)	Formula	FV of dividend	Formula	PV of dividend
0		-		1.0000
10	D10 = D0*(1+g)^n	1.5530	D10/(1+d)^n	0.9178
20	D20 = D0*(1+g)^n	2.4117	D20/(1+d)^n	0.8424
50	D50 = D0*(1+g)^n	9.0326	D50/(1+d)^n	0.6513

Note: Only Future Values of the dividends has been plotted, as stated in the question.