Question

I have part A but need help with B and C

12. Investors require a 15% rate of return on Levine Company's stock (that is, r, = 15%). a. What is the value if the previous dividend was Do= $2.00 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 >r, ? Explain.

Answer 1

12 b. D0=2
1) Price at growth Rate of 15%=D0*(1+g)/(R-g) =2*(1+15%)/(15%-15%) =Cannot be determined
2) 1) Price at growth Rate of 20%=D0*(1+g)/(R-g) =2*(1+20%)/(15%-20%) =-48

These are not reasonable results as when growth is more than required rate price cannot be determined or price is negative.
This is because when required rate is less than or equal to growth rate then the results doesnot make sense.

c. Growth can be greater than required rate for short period
but it is not reasonable for growth rate to be greater than required rate for indefinite period.