Question: Investors require a 15 percent rate of return on Levine Company's stock (rs 15%).
a. What will be Levine's stock value if the previous dividend was D0 $2 and if investors expect dividends to grow at a constant compound annual rate of
(1) 5 percent,
(2) 0 percent,
(3) 5 percent, and
(4) 10 percent?
b. Using data from part a, what is the Gordon (constant growth) model value for Levine's stock if the required rate of return is 15 percent and the expected growth rate is
(1) 15 percent or
(2) 20 percent? Are these reasonable results? Explain.
c. Is it reasonable to expect that a constant growth stock would have g rs?