# Stock Valuation Using the 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 James' 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 Medtans is 13%.

Questions:
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?

#### Solution Preview

... r= 13.00%
growth rate of dividends= g= 6.00%
Stock price= P2= to be calculated
Plugging in the values:
P2= \$15.1429 =1.06/(13.%-6.%)

Next we discount P2 and D2 to year 0 to get the current stock price

Year =PV factor @ 13.% Discounted value
2 D2= \$1.0000 0.7831 \$0.78 =0.7831 x 1
2 P2= \$15.1429 0.7831 \$11.86 =0.7831 x 15.1429
Total= \$12.64

Therefore current stock ...