Investors require a 15% rate of return on Levine Company’s stock (that is, rs = 15%). What is its value if the previous dividend was D0 = $3.75 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 7%, or (4) 11%? Round answers to the nearest hundredth.

Valuation of a constant growth stock

Investors require a 15% rate of return on Levine Company’s stock (that is, rs = 15%).

What is its value if the previous dividend was D0 = $3.75 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 7%, or (4) 11%? Round answers to the nearest hundredth.

(1) $ ____

(2) $ ____

(3) $ ____

(4) $ ____

 

 

answer:

1. – 5% = $3.75 (1-.05) / 0.15+.05 = 3.5625 / 0.2 = $17.8125

2.  @ 0% = $3.75 / 0.15 = $25

3.  7% = $3.75 (1+0.07) / 0.15-0.07 = 4.0125 / 0.08 = $50.15625

4. 11% = $3.75 (1+0.11) / 0.15-0.11 = 4.1625 / 0.04 = $104.0625

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