Investors require a 15% rate of return on Brooks Sisters’s stock (rs = 15%).

a. What would the value of Brooks’s stock be if the previous dividend was D0 = $2 and if investors expect dividends to grow at a constant annual rate of (1) −5%, (2) 0%, (3) 5%, and (4) 10%?

b. Using data from part a, what is the Gordon (constant growth) model’s value for Brooks Sisters’s 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.

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