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# Constant growth dividend valuation model

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You use constant growth dividend valuation model (i.e. Gordon model) to find the current market price of a stock. The required rate of return for this stock increases from 15 to 17 percent combined with an increase in the growth rate from 7 to 9 percent. Given these changes, show whether the price of the stock will rise or fall and by what percent?

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You use constant growth dividend valuation model (i.e. Gordon model) to find the current market price of a stock. The required rate of return for this stock increases from 15 to 17 percent combined with an increase
in the growth rate from 7 to 9 percent. Given these ...

#### Solution Summary

Response provides the steps to compute the price by using the constant growth dividend valuation model

\$2.19

## 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%.

Questions:
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?

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