# 19 8 20 constant growth stock valuation investors

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8-20CONSTANTGROWTH STOCKVALUATIONInvestors require a 15 percent rate of return onLEVINE COMPANY’Sstock (ks=15%).We are asked to determine what Levine Company stock value ought to be if itscost of equity capital (ks…also the required return for retained earnings) is 15% and amost recent paid dividend of \$2.00 (Do).We are to consider the various values for itsstock using four different growth rates (g) of1.- 5 %2.0%3.+ 5 %4.+ 10%a.WHAT WILL BE LEVINE’S STOCK VALUE IF THE PREVIOUSDIVIDEND WAS D0= \$2 AND IF INVESTORS EXPECT DIVIDENDSTO GROW AT A CONSTANT COMPOUND ANNUAL RATE OF(1) -5 %(2)0 %(3)5 %(4) 10 %b.Using the data from part a, what is the Gordon (constant growth) model value forLevine’s stock if the required rate of return is 15 percent and the expectedgrowth rates is(5) 15 %(6) 20 %ARE THESE REASONABLE RESULTS?EXPLAIN.c.IS IT REASONABLE TO EXPECT THAT A CONSTANT GROWTHSTOCK WOULD HAVE G › Ks?20
a.(29(29(2900.44\$05.020.2\$10.015.010.12\$.400.21\$10.010.2\$05.015.005.12\$.333.13\$15.0/2\$.250.9\$20.090.1\$05.015.005.012\$.10000==-===-=====+-=PPPPb.(29.,48\$05.0/40.2\$.20/30.2\$.100nonsenseiswhichPUndefinedP-=-===These results show that the formula does not make sense if the required rate of return isequal to or less than the expected growth rate.c.No.Revised 4-26-0621
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