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Investors require a 18% rate of return on Levine Company's stock (i.e., rs = 18%). What...

Investors require a 18% rate of return on Levine Company's stock (i.e., rs = 18%).

  1. What is its value if the previous dividend was D0 = $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) $

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Homework Answers

Answer #1

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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