In: Finance
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They are co-directors of the company’s pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock valuation process. As a result, Campbell and Morris 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.
What is a constant growth stock? How do you value a constant growth stock?
A constant growth stock is a company whose dividends, earnings or free cash flow to equity grow at a constant rate forever.
We can value such stocks using Gordon growth model, which says thta current price=Expected Dividend/(required return-growth rate)