Question

Maxwell Communications paid a dividend of $1.35 last year. Over the next 12 months, the dividend is expected to grow at 11 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 24 percent. Compute the price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

Current dividend paid (Do) = $1.35

Growth rate (g) = 11% = 0.11

Cost of equity (ke) = 24% = 0.24

Po = Do(1 + g)    

           Ke - g

Po = $1.35(1 + 0.11)

                 0.24 - 0.11

Po = $1.4985

            0.13

Po = $11.53                                                                                                                                                                                                                

Explanation:

The current market price of the stock is a function of current dividend paid, subject to growth rate, divided by the current market price of the stock.