Investors require a 7% rate of return on Mather Company's stock (i.e., r_{s} = 7%).
What is its value if the previous dividend was D_{0} = $1.25 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.
(1) $
(2) $
(3) $
(4) $
(1) $
(2) $
Are these reasonable results?
1.
=1.25*(1+(-5%))/(7%-(-5%))=9.89583333333333
2.
=1.25*(1+(0%))/(7%-(0%))=17.8571428571429
3.
=1.25*(1+(3%))/(7%-(3%))=32.1875
4.
=1.25*(1+(6%))/(7%-(6%))=132.5
5.
=1.25*(1+(8%))/(8%-(8%))=N/A
6.
=1.25*(1+(12%))/(8%-(12%))=-35
7.
These 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.
8.
It is not reasonable for a firm to grow indefinitely at a rate
higher than its required return.
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