Bragg’s Fort Corporation has experienced rapidly growing earnings per share at a rate of 20 percent per annum over the past 15 years. The price of the stock of Bragg’s is $50 per share. Earnings per share are $3. The current dividend rate is $2 per share. Bragg’s has a beta of 1.3. The long-term risk-free rate is 6.9 percent and the expected return on the overall market is 14 percent. The company’s bonds are rated Aa by Moody’s and currently sell to yield 9 percent. The average tax rate of Bragg’s is 30 percent, but its marginal rate is 40 percent.
A new financial analyst has suggested that Bragg’s can be valued using a constant growth dividend valuation model. What constant growth rate would that analyst recommend using if she believes in capital market efficiency and the Capital Asset Pricing Model? Do you agree with her valuation recommendation? Why or why not?