Question

Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 5 $1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 13%. What is the estimated value per share of Boehm’s stock?

Answer 1

Answer: The estimated price of the stock is $22.71

Explanation:

The divident growth model calculates the fair price of the stock.

The formula is,

P = D1 / ( k – g )

where,

P = Price of the stock

k = Required rate of return = 13%

g = Constant growth rate = 6%

$D_{0}$ = Dividend at the end of year 0 = $1.5

$D_{1}$ = Dividend at the end of year 1 = $D_{0}$ ( 1+g) = 1.5(1.06) =$1.59

P = $1.59 / ( 0.13 - 0.06 ) = $22.71