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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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CENGAGE | MINDTAP Ch 09: Homework_EOC_Stocks Investors require a 7% rate of return on Levine Company's stock (i.e., rₛ = 7%). a. What is its value if the previous dividend was D₀ = $1.00 and investors expect dividends to grow at a constant annual rate of (1) -6%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ ______ (2) $ ______ (3) $ ______ (4) $ ______ 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? I. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate. II. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate. III. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return. IV. These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate. V. These results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate. <Select> c. Is it reasonable to think that a constant growth stock could have g > rₛ? I. It is reasonable for a firm to grow indefinitely at a rate higher than its required return. II. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return. III. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return. IV. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return. V. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return. <Select>
Transcribed Image Text:CENGAGE | MINDTAP Ch 09: Homework_EOC_Stocks Investors require a 7% rate of return on Levine Company's stock (i.e., rₛ = 7%). a. What is its value if the previous dividend was D₀ = $1.00 and investors expect dividends to grow at a constant annual rate of (1) -6%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ ______ (2) $ ______ (3) $ ______ (4) $ ______ 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? I. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate. II. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate. III. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return. IV. These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate. V. These results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate. <Select> c. Is it reasonable to think that a constant growth stock could have g > rₛ? I. It is reasonable for a firm to grow indefinitely at a rate higher than its required return. II. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return. III. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return. IV. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return. V. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return. <Select>
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As per the bartelby guidelines only first part of the question will be answered. 

Given information :-

Rate of return (rs) = 7 %Previous year dividend (D0) = $ 1Value can be calculated using following formula := D0 1 + gr - g = D1r - g Where, D1 = Expected dividendg   = Constant growth rate

 

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