The common stock of Peachtree Paper, Inc., is currently selling for $40 a share. A dividend of $2.00 per share was just paid. You are estimating that this dividend will grow at a constant rate of 10%.
(a) Using the constant growth DVM model, what is your required rate of return if $40 is a reasonable trading price? (Show all work.)
(b) If Peachtree Papers is a new company that produces a relatively unknown product, is the constant growth model a good valuation method for a potential investor to use? Justify your answer.

Question

Quizplus · Accepted Answer

The Answer of The common stock of Peachtree Paper, Inc., is currently selling for $40 a share. A dividend of $2.00 per share was just paid. You are estimating that this dividend will grow at a constant rate of 10%.
(a) Using the constant growth DVM model, what is your required rate of return if $40 is a reasonable trading price? (Show all work.)
(b) If Peachtree Papers is a new company that produces a relatively unknown product, is the constant growth model a good valuation method for a potential investor to use? Justify your answer.

The Common Stock of Peachtree Paper, Inc