Investors require a 15 percent rate of return on Goulet Company’s stock (rs = 15%).
a. What will be Goulet’s 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 percent,
(2) 0 percent,
(3) 5 percent,
(4) 10 percent?
b. Using data from part (a), calculate the value for Goulet’s stock if the required rate of return is 15 percent and the expected growth rate is
(1) 15 percent
(2) 20 percent. Are these results reasonable? Explain.
c. Is it reasonable to expect that a constant growth stock would have g > rs?