Question

Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.30. It expects to grow at a constant rate of 2% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

Current price is equal to $16.575

Explanation:

It is given common dividend $D_0=1.30$

Growth rate = 2% = 0.02

Required rate of return = 10% = 0.1

Dividend paid in next year

$D_1=D_0(1+g)=1.30\times 1.02=1.326$

Current price is given by $P_0=\frac{D_1}{R_e-g}$

$P_0=\frac{1.326}{0.1-0.02}=16.575$

Therefore current price is equal to $16.575