Question
Please help me answer b and c, and provide the necessary steps- thanks... Investors require a 13% rate of return on Brooks Sisters's stock (rs
Please help me answer b and c, and provide the necessary steps- thanks...
Investors require a 13% rate of return on Brooks Sisters's stock (rs = 13%).
a. What would the estimated value of Brooks's stock be if the previous dividend were D0 = $3.00 and if investors expect dividends to grow at a constant annual rate of (1) 5%, (2) 0%, (3) 5%, and (4) 10%?
Stock price = D1/(r-g) = D0*(1+g)/(r-g)
(1) Stock price = 3*(1-5%)/(13%+5%) = $15.83
(2) Stock price = 3*(1+0%)/(13%-0%) = $23.08
(3) Stock price = 3*(1+5%)/(13%-5%) = $39.375
(4) Stock price = 3*(1+10%)/(13%-10%) = $110
b. Using data from part a, what is the constant growth model's estimated value for Brooks Sisters's stock if the required rate of return is 13% and the expected growth rate is (1) 13% or (2) 15%? Are these reasonable results? Explain.
c. Is it reasonable to expect that a constant growth stock would have g > rs?
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