STOCK VALUATION Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Company. They are codirectors of the companys pension fund management division, with Balik having responsibility for fixed-income securities (primarily bonds) and Kiefer being responsible for equity investments. A major new client, the California League of Cities, has requested that Mutual of Chicago present an investment seminar to the mayors of the represented cities; and Balik and Kiefer, who will make the actual presentation, have asked you to help them.

To illustrate the common stock valuation process, Balik and Kiefer have asked you to analyze the Bon Temps Company, an employment agency that supplies word-processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions:

1. 1. What is a constant growth stock? How are constant growth stocks valued?
2. 2. What are the implications if a company forecasts a constant g that exceeds its r_s? Will many stocks have expected g > r _s in the short run (i.e., for the next few years)? In the long run (i.e., forever)?