Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of

Question

3 years ago

9

Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of

$1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If an investor requires a 12% return on the stock, what is the value of the stock?

Business

1 answer:

Bezzdna [24] · Answer 1 · 2022-05-21T02:56:12+03:00

Answer:

The value of the stock is $28.57

Explanation:

Data provided in the question:

Dividend paid at the end of the year, D1 = $2.00 per share

Increase in dividend = $1.50 per share

Growth rate, g = 5% = 0.05

Required rate of return = 12% = 0.12

Now,

Price with constant Dividend Growth model = D1 ÷ ( r - g )

= $2 ÷ ( 0.12 - 0.05 )

= $28.57

Hence,

The value of the stock is $28.57