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7 April, 20:36

Investors require an 8% rate of return on Mather Company's stock (i. e., rs 5 8%). a. What is its value if the previous dividend was D0 5 $1.25 and investors expect divi - dends to grow at a constant annual rate of (1) 22%, (2) 0%, (3) 3%, or (4) 5%? b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g. rs? Why or why not?

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  1. 7 April, 20:39
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    1. 12.25

    2. 15.625

    3. 25.75

    4. 43.75

    Explanation:

    Po = Do (1 + g) / (Ke - g)

    (1) Po = Do (1 + g) / (Ke - g)

    Where = Ke = 8%, g = - 2%

    Po = 1.25 (1 - 2%) / (8% + 2%)

    = 1.225 / 10%

    = $12.25

    (2). Po = Do (1 + g) / (Ke - g)

    Where = Ke = 8%, g = 0%

    Po = 1.25 (1 + 0) / (8% - 0)

    = 1.25 / 8%

    = $15.625

    (3). Po = Do (1 + g) / (Ke - g)

    Where = Ke = 8%, g = 3%

    Po = 1.25 (1 + 3%) / (8% - 3%)

    = 1.2875 / 5%

    = $25.75

    (4) Po = Do (1 + g) / (Ke - g)

    Where = Ke = 8%, g = 5%

    Po = 1.25 (1 + 5%) / (8% - 5%)

    = 1.3125 / 3%

    = $43.75
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