On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has anequity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year inperpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was thisa reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price mostlikely indicates that his estimate of dividend growth rate was incorrect.

Question

Business

Joseph Ramos

23 September, 03:20

On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has anequity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year inperpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was thisa reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price mostlikely indicates that his estimate of dividend growth rate was incorrect.

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Answers (1)

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Vaughn Cannon · Answer 1

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:

Current Estimated Stock Price

P0=D1 / (ke-g)

P0 = (0.64 (1.06)) / (0.08-0.06)

P0=33.92