Investors require an 8% rate of return on Mather Company’s stock (i.e., r_s = 8%).
a. What is its value if the previous dividend was D₀ = $1.25 and investors expect dividends to grow at a constant annual rate of (1) –2%, (2) 0%, (3) 3%, or (4) 5%?
b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Are these reasonable results? Explain.
c. Is it reasonable to think that a constant growth stock could have g > r_s? Why or why not?