Question

Forral Company has never paid a dividend. But the company plans to start paying dividends in two years-that is, at the end of Year 2. The first dividend is expected to equal $3 per share. The second dividend and every dividend thereafter are expected to grow at a 5 percent rate. If investors require a 13 percent rate of return to purchase Forral's common stock, what should be the market value of its stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

$5.42, Hope It Helps!! (wooo! 3 minutes in and I answered it :D. Now that deserves a brainliest doesn’t it? :3)

Step-by-step explanation:

To calculate the market value of Forral Company's stock today, we need to use the dividend discount model formula:

[ P_0 = \frac{D_1}{1 + r} + \frac{D_2}{(1 + r)^2} ]

where:

( P_0 ) = current market value of the stock

( D_1 ) = first dividend per share = $3

( D_2 ) = second dividend per share

( r ) = required rate of return = 13%Dividend growth rate = 5%

First, calculate the second dividend:

[ D_2 = D_1 \times (1 + g) = $3 \times (1 + 0.05) = $3.15 ]Now plug the values into the formula:

[ P_0 = \frac{3}{1 + 0.13} + \frac{3.15}{(1 + 0.13)^2} ]

[ P_0 = \frac{3}{1.13} + \frac{3.15}{1.13^2} ]

[ P_0 = 2.65486725664 + 2.76361487625 ]

[ P_0 = 5.42 ]Therefore, the market value of Forral Company's stock today should be approximately $5.42.