Constant Growth Model
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B20. (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 Medtrans is 13%.
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?
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Answer a: $12.64
Answer b: $7.70
** Please see the attachment for calculations and formulas. **
You will need to use a constant growth formula and then determine the present value of the value of the stock in Year 1 or ...
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