ETHICS PROBLEM Messa is trying to value Genenic Ubity Inc \'s stock which is cle

Question

ETHICS PROBLEM Messa is trying to value Genenic Ubity Inc 's stock which is cleary not growing at as Genenic deciared ane paid a divisend ot 511 last year The requede of etu fority stoos a s unsue atou e tranca assuming tha Meissa ncudes the extra 11% "crediolty"riskpremu? b. What is e vaue of Oenenics stock, c. What in the Sference betveen the val es found in parts a and b, and now mioht one interpret that that the requred rate of refurn for uilty socks is scelicabie to Generc Uity Inc, Round to the nearet cent ofonencs stock assuming that Meissa nadet" etra 1% oredbity-nat premium, st (RMd to the nearest art ) G. Camoaring the findings in parts a and b the amount he expected value of the stoox r Melssa indlsdes a credbility premum in her calculations, w be ess than whan isuming Based on your ansuer sbove. judge whether the tallewing statement is true or tase? (Selectthe bt e bw) Lack of insegnity may huit stock pnices because of the treacsity premum O False

Explanation / Answer

a) We can use the dividend discount model to answer the question:

11(1+g)/r-g

g= growth rate =0

r=discount rate =0.07

Hence, value of the stock

11(1+0)/0.07-0

=$ 157.1429

b) With an extra credit premium the discount rate will increase from 0.07 to 0.08. Hence, the value of the stock:

11/0.08

= $ 137.50

c) The difference of (157.1429-137.50) = $ 19.642 is due to lack of credibility in Generic’s financial reporting. This lack causes the valuation of stock price to drop.

d) Lack of integrity may hurt the stock prices due to credibility premium:

TRUE

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