Assignment 9.1 - Assignment 9.1 9-12 Valuation of a...

Assignment 9.1
9-12 Valuation of a constant growth stock Investors require a 15 percent rate of
return on Levine Company’s stock (that is, rs 15%).
a. What is its value if the previous dividend was D0 $2 and investors expect
dividends to grow at a constant annual rate of (1) 5 percent, (2) 0 percent, (3) 5
percent, or (4) 10 percent?
b. Using data from part a, what would the Gordon (constant growth) model value be
if the required rate of return were 15 percent and the expected growth rate were (1)
15 percent or (2) 20 percent? Are these reasonable results? Explain.
c. Is it reasonable to think that a constant growth stock could have g rs?

Assignment 9.1