Medtrans is a profitable firm that is not paying a dividend on its common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will begin paying a $1.00 per share dividend in two years and that the dividend will increase 6% annually thereafter. Bret Kimes, one of James' colleagues at the same firm, is less optimistic. Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend will be $1.00, and that it will grow at 4% annually. James and Bret agree that the required return for Medtrans is 13%.
1. What value would James estimate for this firm?
2. What value would Bret assign to the Medtrans stock?
a. P1 = D2 / (r - g) = $1.00 / (0.13 - 0.06) = $14.3
P0 = ...
The solution provides detailed explanations and answer for the problem.