Investors require a 13% Rate of return on Brooks Sister's Stock (rs=13%)
a. What would the estimated value of Brooks's stock be if the previous dividend were D0=$3.00 and if investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 5% and (4) 10%?
b. Using the data from part a, what is the constant growth model's estimated value for Brooks's Sister's stock if the required rate of return is 13% and the expected growth rate is (1) 13% or (2) 15%? Are these reasonable results? Explain?
c. Is it reasonable to expect that a constant growth stock would have g>rs?© BrainMass Inc. brainmass.com October 25, 2018, 10:05 am ad1c9bdddf
Stock Valuation Using the Constant Growth Model
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 Medtans is 13%.
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?