Question
This year, Midland Light and Gas (ML&G) paid its stockholders an annual dividend of $2.00 a share. A major brokerage firm recently put out a
This year, Midland Light and Gas (ML&G) paid its stockholders an annual dividend of $2.00 a share. A major brokerage firm recently put out a report on ML&G predicting that the company's annual dividends should grow at the rate of 6% per year for each of the next seven years and then level off and grow at the rate of 3% a year thereafter. (Note: Use four decimal places for all numbers in your intermediate calculations.)
a. Use the variable-growth DVM and a required rate of return of 9.00% to find the maximum price you should be willing to pay for this stock. $???
b. Redo the ML&G problem in part a, this time assuming that after year 7, dividends stop growing altogether (for year 8 and beyond,g=0 Use all the other information given to find the stock's intrinsic value. $???
c. Contrast your two answers and comment on your findings. How important is growth to this valuation model?
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