Dividend Growth Model

Investors require the rate of return on Bruno Bro's stock that is listed on the right.

a. What would the estimated value of Bruno's stock be if the previous dividend (listed on the right) and if the investors expected dividends to grow at a constant annual rate of (a1), (a2), and (a3) listed on the right. (10 points)

b. What if the constant growth rate was (b1) or (b2)?

Can we even use the constant growth model to calculate the value of the stock?

Can this equation be used if the constant growth rate is equal to, or higher than the required rate of return? (5 points)

rs	13%
D0	$ 3.50
a1	0%
a2	5%
a3	10%
b1	13%
b2	15%

a	1
	2
	3
b

If the constant growth rate is the same as the required rate of return...

If the constant growth rate is greater than the required rate of return...