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VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's...

VALUATION OF A CONSTANT GROWTH STOCK

Investors require a 16% rate of return on Levine Company's stock (i.e., rs = 16%).

What is its value if the previous dividend was D0 = $3.50 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 7%, 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)

Value of stock = D1 / required rate of return - growth

Value of stock = 3.5 ( 1 - 0.02) / 0.16 - ( -0.02)

Value of stock = 3.43 / 0.18

Value of stock = $19.06

2)

Value of stock = 3.5 ( 1 + 0) / 0.16 - 0

Value of stock = 3.5 / 0.16

Value of stock = $21.88

3)

Value of stock = 3.5 ( 1 + 0.07) / 0.16 - 0.07

Value of stock = 3.745 / 0.09

Value of stock = $41.61

4)

Value of stock = 3.5 ( 1 + 0.13) / 0.16 - 0.13

Value of stock = 3.955 / 0.03

Value of stock = $131.83

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