Question

Stoneheart Group is expected to pay a dividend of $3.11 next year. The company's dividend growth rate is expected to be 4.2 percent indefinitely and investors require a return of 11.4 percent on the company's stock. What is the stock price?

Answer 1

Answer:

$43.19

Explanation:

Use dividend discount model(DDM) to solve this question; specifically constant dividend growth model.

P0 = D1/(r-g)

P0 = Current price

D1 = Next year's dividend = $3.11

r = investors' required return = 11.4% or 0.114 as a decimal

g = dividend growth rate = 4.2% or 0.042 as a decimal

P0 = 3.11/(0.114 - 0.042)

P0 = $43.19

Therefore, this stock price is $43.19