VALUATION OF A CONSTANT GROWTH STOCK Investors require an 8% rate of return on Mather Company's stock (i.e., r̟ = 8%). 9-12 a. What is its value if the previous dividend was D, = $1.25 and investors expect divi- dends to grow at a constant annual rate of (1) –2%, (2) 0%, (3) 3%, or (4) 5%? b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g >r? Why or why not?
VALUATION OF A CONSTANT GROWTH STOCK Investors require an 8% rate of return on Mather Company's stock (i.e., r̟ = 8%). 9-12 a. What is its value if the previous dividend was D, = $1.25 and investors expect divi- dends to grow at a constant annual rate of (1) –2%, (2) 0%, (3) 3%, or (4) 5%? b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g >r? Why or why not?
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter9: Stocks And Their Valuation
Section: Chapter Questions
Problem 12P
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