On a certain date, Kastbro has a stock price of $37. 50, pays a dividend of $0.

Question

On a certain date, Kastbro has a stock price of $37. 50, pays a dividend of $0. 64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. lie then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action? No, since the constant dividend growth rate gives a stock estimate greater than $37. 50. No, since the constant dividend growth rate gives a stock estimate of $37. 50. Yes, since the constant dividend growth rate gives a stock estimate greater than $37. 50. No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

Explanation / Answer

Constant-Growth Rate DDM Formula Intrinsic Value = D1/k-g D1 = Next Year's Dividend k = Capitalization Rate g = Dividend Growth Rate=6% Intrinsic stock Value = 33.92 Answer:- option C:-Yes

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