(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 JamesÂ' 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?
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 JamesÂ' 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?
