Question

Investors require a 17% rate of return on Levine Company's stock
(that is, r_{s} = 17%).

- What is its value if the previous dividend was D
_{0}= $2.00 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 2%, or (4) 10%? Round answers to the nearest hundredth.

(1) $

(2) $

(3) $

(4) $ - 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 were (1) 15% or (2) 20%? Are these reasonable
results?

- These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return.
- The results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate.
- The results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate.
- The results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate.
- The results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate.

-Select one - Is it reasonable to think that a constant growth stock could
have g > r
_{s}?

- It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.
- It is not reasonable for a firm to grow indefinitely at a rate lower than its required return.
- It is not reasonable for a firm to grow indefinitely at a rate equal to its required return.
- It is not reasonable for a firm to grow indefinitely at a rate higher than its required return.
- It is reasonable for a firm to grow indefinitely at a rate higher than its required return.

-Select one

Answer #1

1)Price of Stock =Do*(1+g)/(Re-g)

At growth of -2%

Price of Stock =2*(1-2%)/(17%+2%) =10.32

2)At growth of 0%

Price of Stock =2*(1+0%)/(17%-0%) =11.76

3)At growth of 2%

Price of Stock =2*(1+2%)/(17%-2%) =13.60

4)At growth of 10%

Price of Stock =2*(1+10%)/(17%-10%) =31.43

b)At growth of 15%

Price of Stock =2*(1+15%)/(17%-15%) =115.00

At growth of 20%

Price of Stock =2*(1+20%)/(17%-20%) =-80.00

Option II is correct option if required rate is less or equal to
growth results don't make sense

c) Option IV is correct option

Investors require a 17% rate of return on Levine Company's stock
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intermediate calculations. Round your answers to two decimal
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