Problem 9-12 Valuation of a constant growth stock Investors require a 18% rate of return on Levine...

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Finance

Problem 9-12
Valuation of a constant growth stock
Investors require a 18% rate of return on Levine Company's stock(i.e., r_s = 18%).
What is its value if the previous dividend was D₀ =$3.00 and investors expect dividends to grow at a constant annualrate of (1) -5%, (2) 0%, (3) 3%, or (4) 11%? Round your answers totwo decimal places.
(1) $
(2) $
(3) $
(4) $
Using data from part a, what would the Gordon (constant growth)model value be if the required rate of return was 15% and theexpected growth rate were (1) 15% or (2) 20%? Are these reasonableresults?
The results show that the formula makes sense if the requiredrate of return is equal to or greater than the expected growthrate.
These results show that the formula does not make sense if theexpected growth rate is equal to or less than the required rate ofreturn.
The results show that the formula does not make sense if therequired rate of return is equal to or less than the expectedgrowth rate.
The results show that the formula does not make sense if therequired rate of return is equal to or greater than the expectedgrowth rate.
The results show that the formula makes sense if the requiredrate of return is equal to or less than the expected growthrate.

-Select-IIIIIIIVVItem 5
Is it reasonable to think that a constant growth stock couldhave g > r_s?
It is not reasonable for a firm to grow even for a short periodof time at a rate higher than its required return.
It is not reasonable for a firm to grow indefinitely at a ratelower than its required return.
It is not reasonable for a firm to grow indefinitely at a rateequal to its required return.
It is not reasonable for a firm to grow indefinitely at a ratehigher than its required return.
It is reasonable for a firm to grow indefinitely at a ratehigher than its required return.

Answer & Explanation Solved by verified expert

3.8 Ratings (478 Votes)

a Given Rate of return required r 18 D0 3 Growth rate g Hence D1 D01g 1 when g 5 Price of Stock P0 D1r g 31005018 005 1239 2 when g 0 Price of Stock P0 See Answer

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Problem 9-12Valuation of a constant growth stockInvestors require a 18% rate of return on Levine Company's stock(i.e., rs = 18%).What is its value if the previous dividend was D0 =$3.00 and investors expect dividends to grow at a constant annualrate of (1) -5%, (2) 0%, (3) 3%, or (4) 11%? Round your answers totwo decimal places.(1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon (constant growth)model value be if the required rate of return was 15% and theexpected growth rate were (1) 15% or (2) 20%? Are these reasonableresults? The results show that the formula makes sense if the requiredrate of return is equal to or greater than the expected growthrate.These results show that the formula does not make sense if theexpected growth rate is equal to or less than the required rate ofreturn.The results show that the formula does not make sense if therequired rate of return is equal to or less than the expectedgrowth rate.The results show that the formula does not make sense if therequired rate of return is equal to or greater than the expectedgrowth rate.The results show that the formula makes sense if the requiredrate of return is equal to or less than the expected growthrate.-Select-IIIIIIIVVItem 5Is it reasonable to think that a constant growth stock couldhave g > rs?It is not reasonable for a firm to grow even for a short periodof time at a rate higher than its required return.It is not reasonable for a firm to grow indefinitely at a ratelower than its required return.It is not reasonable for a firm to grow indefinitely at a rateequal to its required return.It is not reasonable for a firm to grow indefinitely at a ratehigher than its required return.It is reasonable for a firm to grow indefinitely at a ratehigher than its required return.