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VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of return on Levine Company’s stock that is, r s = 15%). a. What is its value if the previous dividend was D 0 = $2 and investors expect dividends to grow at a constant annual rate of (1) −5%, (2) 0%, (3) 5%, or (4) 10%? b. Using data from Part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g > r s ? Why or why not?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 9, Problem 12P
Textbook Problem

VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of return on Levine Company’s stock that is, rs = 15%).

  1. a. What is its value if the previous dividend was D0 = $2 and investors expect dividends to grow at a constant annual rate of (1) −5%, (2) 0%, (3) 5%, or (4) 10%?
  2. b. Using data from Part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? Explain.
  3. c. Is it reasonable to think that a constant growth stock could have g > rs? Why or why not?

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Chapter 9 Solutions

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