The Ordinary Share of Peachtree Paper, Inc

question 26

Essay

The ordinary share 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 Paper 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.

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Definitions:

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