Question

Constant Growth Stock Valuation

Investors require a 17% rate of return on Brooks Sisters' stock (r_s = 17%).

1. What would the value of Brooks' stock be if the previous dividend was D₀ = $1 and if investors expect dividends to grow at a constant compound annual rate of (1) - 5%, (2) 0%, (3) 5%, or (4) 11%? Round your answers to the nearest cent.
   1. $  
      
   2. $  
      
   3. $  
      
   4. $  
2. Using data from part a, calculate the Gordon (constant growth) model's value for Brooks Sisters' stock if the required rate of return is 17% and the expected growth rate is (1) 17% or (2) 19%? Are these reasonable results? Explain.
   1. -Select-Yes, it is reasonable result.No, it is not reasonable result, because in this case the value of stock is undefined.No, it is not reasonable result, because in this case the value of stock is negative, which is nonsense.Item 5
      
   2. -Select-Yes, it is reasonable result.No, it is not reasonable result, because in this case the value of stock is undefined.No, it is not reasonable result, because in this case the value of stock is negative, which is nonsense.Item 6
3. Is it reasonable to expect that a constant growth stock would have g > r_s?
   -Select-YesNo

Answer 1