B20. (Constant growth model) Medtrans is a profitable firm that is not

QUESTION

B20. (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 K
Calculating the Current value of the firm:a) According to the estimation of James,D1 = $1.00D2 = $1.00Growth rate = 6%Years = 2Required return (R) = 13%P2 = D3 / (R-g) = [$1.00 (1 0.06)] / (0.13 0.06) = $15.143According to Constant Dividend growth model, the formula for calculating the present value of the stock isP0 = D1 / (1 R)^1 D2 / (1 R)^2 P2 / (1 R)^2 = $1.00 / (1 0.13) $1.00 / (1 0.13)^2 $15.143 / (1 0.13)^2 = $0.885 $0.783 $11.86 = $13.53Therefore,. the present value of the stock is $13.53b) CAlculating the value of the stock according to Bret estimation:D1 = $1.00D2 = $1.00D3 = D2 * (1 g) = $1.00 (1 0.04) = $1.04D4 = D3 * (1 g) = $1.04 (1 0.04) = $1.082Growth rate =

Years = 4Required return (R) = 13%P4 = D5 / (R-g) = [$1.082 (1 0.04)] / (0.13 0.04) = $12.5According to Constant Dividend growth model, the formula for calculating the present value of the stock isP0 = D1 / (1 R)^1 D2 / (1 R)^2 D3 / (1 R)^3 D4 / (1 R)^4 P4 / (1 R)^4 = $1.00 / (1 0.13) $1.00 / (1 0.13)^2 $1.04 / (1 0.13)^3 $1.082 / (1 0.13)^4 $12.5 /(1 0.13)^4 = $0.885 $0.783 $0.72 $0.664 $7.67 = $10.72Therefore,. the present value of the stock is $10.72

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