VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of return on Levine Company’s stock (that is, rs = 15%).
a. What is its value if the previous dividend was D0 = $2 and investors expect dividends to grow at a constant annual rate of (1) −5%, (2) 0%, (3) 5%, or (4) 10%?
b. Using data from Part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? Explain.
c. Is it reasonable to think that a constant growth stock could have g > rs? Why or why not?