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Constant Growth Rate

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Alexander Corp. will pay a dividend of $2.60 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a 15 percent rate of return, how much will you pay for the stock? What if you want a 10 percent rate of return? What does this tells you about the relationship between the required return and the stock price?

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Solution Summary

This solution goes through the concept of constant growth rate within the context of capital budgeting.

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According to the discounted dividend model, p = d/(r-g) where p = price, d = ...

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