Why do stock prices change? Suppose the expected D1 is $2, the growth rate is 5%, and rs is 10%. Using the constant growth model, what is the price? What is the impact on stock price if g is 4% or 6%? If rs is 9% or 11%?
Sam Strother and Shawna Tibbs are senior vice presidents of Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Strother having responsibility for fixed income securities (primarily bonds) and Tibbs being responsible for equity investments. A major new client, the Northwestern Municipal League, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them.