Question

A stock just paid a dividend of d0 = $1.50. the required rate of return is rs = 10.26%, and the constant growth rate is g = 4.0%. what is the current stock price?

Answer 1

Answer:

The current stock price is $25.

Explanation:

Since the dividend is $1.50

The required Rate of return is 10.26%

Constant growth rate is 4.0%

Therefore,

The current stock price is

= dividened x (1+constant growth rate)/required Rate of return - constant growth rate.

=$1.50 x (1+ 4%)/10.26% - 4.0%

=$1.50 x (1+0.04)/0.1026 - 0.04

= $1.50 x (1.04)/0.0626

=$1.56/0.0626

=$24.92

The current stock price is therefore $25. Approximated to the nearest dollar.