# Stock Valuation Using the Constant Growth Model

Not what you're looking for?

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?

##### Purchase this Solution

##### Solution Summary

This solution is comprised of a step by step response which illustrates how to estimate the value for both the firm and the Medtrans stock. An Excel file is also attached which formats this solution in a more structured manner.

##### Solution Preview

Please see the attached file.

a. What value would James estimate for this firm?

Year Dividend growth rate Dividend

2 D2 $1.0000

3 D3 6.0% $1.0600 =( 1 + 6.% ) x $1.

Find the value of the stock at end of year 2

Using the Dividend Discount (Constant Growth) Model

P2= D3/ (r-g)

Dividend for the year 3 = D3= $1.0600

required ...

##### Purchase this Solution

##### Free BrainMass Quizzes

##### Basics of corporate finance

These questions will test you on your knowledge of finance.

##### SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

##### Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

##### Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

##### Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media