Question

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.55 next year. The growth rate in dividends for all three companies is 3 percent. The required return for each company’s stock is 5 percent, 8 percent, and 11 percent, respectively. What is the stock price for each company? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

$127.50 ; $51.00 and $31.88

Explanation:

The computation of the stock price is shown below:

As we know that

Stock price = Next year dividend ÷ (Required rate of return - growth rate)

So for Red Inc, it would be    

= $2.55 ÷ (5% - 3%)

= $127.50

So for Yellow corp, it would be

= $2.55 ÷ (8% - 3%)

= $51.00

And, for blue company, it would be

= $2.55 ÷ (11% - 3%)

= $31.88