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mamaluj [8]
3 years ago
8

Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.50. It expects to grow at a constant rate of 2

% per year. If investors require a 8% 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. $ per share
Business
1 answer:
mr Goodwill [35]3 years ago
7 0

Answer:

The current price of Hubbard's common stock is <u>$25.50</u>.

Explanation:

This can be calculated using the Gordon growth model (GGM) formula that assumes growth is dividend will be constant as follows:

P = D1/(r - g) ............................ (1)

Where,

P = Current stock price = ?

D1 = Next dividend =  D0 * (1 + g) = $1.50 * (1 + 2%) = $1.53

r = required return = 8%, or 0.08

g = growth rate = 2%, or 0.02

Substituting the values into equation (1), we have:

P = $1.53 / (0.08 - 0.02) = $25.50

Therefore, the current price of Hubbard's common stock is <u>$25.50</u>.

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