Investors require a 18 rate of return on Levine Companys sto

Investors require a 18% rate of return on Levine Company\'s stock (i.e., rs = 18%).

What is its value if the previous dividend was D0 = $1.25 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 4%, or (4) 13%? Do not round intermediate calculations. Round your answers to two decimal places.

Solution

price of stock = D0(1+g) / (k-g)

D0 = previously paid dividend

g = growth rate (-3% , 0% , 4% , 13%)

k = reqired rate of return = 18% =>0.18.

now,

1. -3%

price of stock = $1.25 *(1+(-0.03)) / (0.18-(-0.03))

=>$1.2125 / (0.21)

=>$5.77.

2. 0%.

price of stock = $1.25 *(1+0%) / (0.18-0)

=>$6.94.

3.4%.

price of stock = $1.25*(1+0.04) / (0.18-0.04)

=>$1.3 / 0.14

=>$9.29.

4.13%.

price of stock = $1.25*(1.13) / (0.18-0.13)

=>$28.25.