Question

A firm just paid a dividend of $4.30. The dividend is expected to grow at a constant rate of 2.68% forever and the required rate of return is 14.75%. What is the value of the stock?

Answer 1

Answer:

The value of the stock is $36.53

Explanation:

To calculate the value of the stock, we'll use the formula

$P = \frac{D1}{r-g}$......(a)

where, P = price of stock

D1 = Estimated dividend for next period

r = required rate of return

g = growth rate

First we will calculate D1,

Do is the dividend whic the firm just paid = $4.30

D1 = Do(1+g)

D1 = 4.30(1+2.68)

D1 = $4.41

Substituting the values in the formula....(a)

P = 4.41 / (14.75% - 2.68%)

P =  4.41 / 12.07%

P = $36.53

Answer 2

Answer:

Value of the stock is $36.58

Explanation:

For the given information in the question, we apply the constant growth dividend discount model to calculate the value of the stock as below

Value of the stock = [Do x ( 1 + g)^t]/ ( (r - g);

in which:

                    Do = this year dividend = $4.30;

                    g = growth rate = 2.68%;

                    r = expected return = 14.75%;

So we have: Value of the stock = 4.3 x (1+2.68%) / (14.75% - 2.68%) = $36.58.

So, the answer is $36.58.