Investors require a 18% rate of return on Levine Company's stock (i.e., r_{s} = 18%).
What is its value if the previous dividend was D_{0} = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 2%, or (4) 13%? Do not round intermediate calculations. Round your answers to two decimal places.
(1) $
(2) $
(3) $
(4) $
1) calculation of current price when growth is -2%
D1= D0*(1+growth)= 2.25*(1-0.02) = 2.205
Current price= D1/(return - growth)
Current price= 2.205/(0.18+0.02)= 2.205/0.2= 11.025
Current price is $11.03
2) calculation of current price when growth is 0%
D1= 2.25*(1+0)= 2.25
Current price= 2.25/(0.18-0) = $12.50
Current price is $12.50
3) calculation of current price when growth is 2%
D1= 2.25*(1+0.02)= 2.295
Current price= 2.295/(0.18-0.02)= 2.295/0.16= 14.34
Current price is $14.34
4) calculation of current price when growth is 13%
D1= 2.25*(1+0.13)= 2.5425
Current price= 2.5425/(0.18-0.13)= 2.5425/0.05= 50.85
Current price is $50.85
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