Question

The RLX Company just paid a dividend of $2.85 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. Assume investors require a return of 10 percent on this stock. What is the current price?

Answer 1

The current stock price is $54.15.

Given that  RLX Company just paid a dividend of $2.85 per share on its stock and dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely.

Stock valuation alludes to the valuation of the natural worth per portion of an organization's stock which can help the organization in deciding its reasonable worth in case of twisting up or consolidation. One of the models used to esteem the stock cost is the profit development model. It expects the cost of the stock to be the current worth representing things to come profits of the stock accepted to develop at a consistent rate.

Dividend (D0) = $2.85

Growth rate (g) = 4.5%

Required return (r) = 10%

Firstly, we have to calculate the value of the current stock price.

The current stock price can be calculated by using the dividend growing model.

$\begin{aligned}\text{Current stock price}&=\frac{D_{0}\times(1+g)}{r-g}\\ &=\frac{2.85\times (1+0.045)}{0.10-0.045}\\ &=\frac{2.85\times 1.045}{0.055}\\ &=\frac{2.97825}{0.055}\\ &=54.15\end$

Hence, the current stock price when dividend of $2.85 are expected to grow at a constant rate of 4.5 percent per year, indefinitely is $54.15.

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