(Constant growth model) Medtrans is a profitable firm that is not paying a divid

Question

(Constant growth model) Medtrans is a profitable firm that is not paying a dividend on its
common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will
begin paying a $1.00 per share dividend in two years and that the dividend will increase
6% annually thereafter. Bret Kimes, one of James’ colleagues at the same firm, is less optimistic.
Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend
will be $1.00, and that it will grow at 4% annually. James and Bret agree that the
required return for Medtrans is 13%.
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?

Explanation / Answer

(a) Calculating Value of the Medtrans Stock estimated byJames: Dividend Paid in 2 years(D2)   = $1 Dividend growth rate(g) = 6% Required Rate of Return (R) = 13% Medtrans Stock Value(P2) = D3 / (R - g) Medtrans Stock Value(P2) = D2 (1+g) / (0.13 - 0.06) Medtrans Stock Value(P2) = $1 (1.06) / 0.07 Medtrans Stock Value(P2) = $1.06 / 0.07 Medtrans StockValue = $15.14 (b) CalculatingMedtrans Stock assigned by Bret: Medtrans Stock Value(P4) = D5 / (R - g) Medtrans Stock Value(P4) = D5 (1+g) / (0.13 -0.04) Medtrans Stock Value(P4) = $1 (1.04) / 0.09 Medtrans Stock Value(P4) = $1.04 / 0.09 Medtrans StockValue = $11.55

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.