Problem 19.6

Highlight/bold final answers

Please show all work and formulas used:

Dividend Growth Model Example:

Investors require the rate of return on Warren Buffet's stock that is listed.

a. What would the estimated value of Buffet's stock be if the previous dividend (listed on the right) and if the investors expected dividends to grow at a constant annual rate of (a1), (a2), and (a3) listed below.

b. What if the constant growth rate was (b1) or (b2)? Can we even use the constant growth model to calculate the value of the stock? Can this equation be used if the constant growth rate is equal to, or higher than the required rate of return?

rS= 15.5%

D0= $6

a1= 0%

a2= 5%

a3= 10%

b1 = 15.5%

b2= 16%

If the constant growth rate is the same as the required rate of return then

If the constant growth rate is greater than the required rate of return then

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