On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has anequity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year inperpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was thisa reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price mostlikely indicates that his estimate of dividend growth rate was incorrect.

Question

Douglas Brown

Business

1 August, 02:30

On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has anequity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year inperpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was thisa reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price mostlikely indicates that his estimate of dividend growth rate was incorrect.

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Answers (1)

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Anne Mcclain · Answer 1

No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

Explanation:

Current Estimated Stock Price

P0=D1 / (ke-g)

P0 = (0.64 (1.06)) / (0.08-0.06)

P0=33.92