An investor expects the dividend rate to increase

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On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action?

No, since the constant dividend growth rate gives a stock estimate of $37.50.

No, since the constant dividend growth rate gives a stock estimate greater than $37.50.

Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50.

No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

Reference no: EM131048542

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