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Constant Growth Stock Valuation Models

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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?

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