Medtrans - year, thus find the value of the firm at the end...

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(Constant growth model) Medtrans is a profitable firm that is not paying a dividend  on its common stock. James Weber, an analyst for A. G. Edwards, believes that  Medtrans will begin paying a $1.00 per share dividend in two years and that the  dividend   will   increase   6%   annually   thereafter.   Bret   Kimes,   one   of   James’s  colleagues at the same firm, is less optimistic. Bret thinks that Medtrans will begin  paying a dividend in four years, that the dividend will be $1.00, and that it will grow  at 4% annually. James and Bret agree that the required return for Medtrans is  13%. a. What value would James estimate for this firm? Dividend paid is $1 for 2 years and then it would grow at 6% annually from the third 
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Unformatted text preview: year, thus find the value of the firm at the end of second year. P1 = D2 / (r g) = $1/ (13% - 6%) = $14.29 To find out the present value of stock, discount the value of stock @13% P0 = P1/ (1 + r) 1 = 14.29/ (1 + 0.13) 1 = $12.64 b. What value would Bret assign to the Medtrans stock? Dividend paid is $1 for 4 years and then it would grow at 4% annually from the fifth year, thus find the value of the firm at the end of fourth year. P3 = D4 / (r g) = $1/ (13% - 4%) = $11.11 To find out the present value of stock, discount the value of stock @13% P0 = P1/ (1 + r) 3 = 11.11/ (1 + 0.13) 3 = $7.70...
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