Question

suppose big d inc just paid a dividend of .50 per share it is expected dto increase its dividend by 2 per year if the market requires a return of 10 on assets of this risk how much wshould the stock be selling for

Answer 1

The question is incorrect, the correct question is stated below.

Suppose Big D, inc., just paid a dividend of $0.50 per share.  It is expected to increase its dividend by 2% per year. If the market requires a return of 10% on assets of this risk, how much should the stock be selling for?

Answer:

The stock should be selling for P0 = $6.375 rounded off to $6.38

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

• D0 * (1+g) is dividend expected for the next period

• g is the growth rate

• r is the required rate of return  

P0 = 0.5 * (1+0.02)  /  (0.10 - 0.02)

P0 = $6.375 rounded off to $6.38