VALUATION OF A CONSTANT GROWTH STOCK

VALUATION OF A CONSTANT GROWTH STOCK
Investors require a 15% 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%, ( 2) 0%, ( 3) 5%, or ( 4) 10%?
b. Using data from Part a, what would the Gordon ( constant growth) model value be if the required rate of return was 15% and the expected growth rate was ( 1) 15% or ( 2) 20%? Are these reasonable results? Explain.
c. Is it reasonable to think that a constant growth stock could have g > rs? Explain.
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