# need to understand the reasoning

(Gordon growth model) to find the value of each firm shown in the following table. Firm Dividend expected next year Dividend growth rate Required return A \$1.20 8% 13%B 4.00 5 15C 0.65 10 14D 6.00 8 9E 2.25 8 20 P7—9 Common stock value: Constant growth McCracken Roofing Inc. common stockpaid a dividend of \$1.20 per share last year. The company expects earnings and divi—dends to grow at a rate of 5% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of\$2 8 P b. If McCracken expects both earnings and dividends to grow at an annual rate of10%, What required rate of return would result in a price per share of \$28? P7—8 Common stock value: Constant growth Use the constant—growth dividend model(Gordon growth model) to find the value of each firm shown in the following table. Firm Dividend expected next year Dividend growth rate Required return A \$1.20 8% 13%B 4.00 5 15C 0.65 10 14D 6.00 8 9E 2.25 8 20 P7—9 Common stock value: Constant growth McCracken Roofing Inc. common stockpaid a dividend of \$1.20 per share last year. The company expects earnings and divi—dends to grow at a rate of 5% per year for the foreseeable future. a. What required rate of return for this stock would result in a price per share of\$2 8 P b. If McCracken expects both earnings and dividends to grow at an annual rate of10%, What required rate of return would result in a price per share of \$28?

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