Estimating Stock's Price
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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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Solution Summary
Solution describes the steps to estimate stock's price based upon two projections.
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Solution:
a)
According to James
r=13%
g=6%
D1=0
D2=$1
D3=$1*(1+.06)=$1.06
D4=$1.06*(1+0.06)= $1.1236
And so on....
According to constant ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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