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.