Question

The stock of robotic atlanta inc. is trading at $ 37.96 per share. in the past, the firm has paid a constant dividend (i.e., g = 0) of $ 5.56 per share and it has just paid an annual dividend (i.e., d0 = 5.56 ). however, the company will announce today new investments that the market did not know about. it is expected that with these new investments, the dividends will grow at 4.0 % forever. assuming that the discount rate remains the same, what will be the price of the stock after the announcement? (round your answer to 2 decimal places and record your answer without dollar sign or commas).

Answer 1

The price of the share will be calculated as under. First, we will calculate the cost of equity.

Dividends = $ 5.56

Current market price = $ 37.96

Cost of equity = Dividends ÷ Current market price = $ 5.56 / $ 37.96

Cost of equity = 14.65 %

Now, The price of share will be calculated as -

Growth rate = 4 %

Dividend paid = $ 5.56

Cost of equity = (Expected dividend ÷ Price ) + Growth rate

14.65 % = [ ($ 5.56 * ( 1 + 4 %) ) / Price ] + 4 %

10.65 % = $ 5.7824 / price

Price = $ 5.7824 / 10.65 % = $ 54.29