[culber2]

Constant Growth Stock Valuation:
investors require a 15% rate of return on Brooks Sisters stock (rs = 15%).

1. What will be Brooks Sisters' 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%,
(2) 0%, (3) 5%, and (4) 10%?

2. Using data from part 1, what is the Gordon (constant growth) model value for Brooks Sisters' stock if the required rate of return is 15% and the expected growth rate is (1) 15% or (2) 20%? Are these reasonable results? Explain.

3. Is it reasonable to expect that a constant growth stock would have g > rs?

[ArcSine]

(I'm using r for the discount rate (required rate of return) and g for the expected growth rate.)

The Gordon growth model (GGM) uses the expected dividend, one year away, in the numerator. For Question 1, you're given the most recent dividend, and various expectations for the dividend's growth (pos or neg). From this, you can quickly determine the expectations for next year's dividend under the four scenarios. Pop those into GGM to price the stock.

For Q2, look at GGM's denominator. What happens when r = g? When r < g?

Back to you, amigo. Post back with what you're coming up with, and we can discuss further if need be.