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ahrayia [7]
3 years ago
7

The Delta Manufacturing Company has a marginal tax rate of 21 %. The last dividend paid by Delta was $2.60. The expected long-ru

n growth rate is 4%. If investors require 11% rate of return, what is the current price of the stock (P0)?
Business
1 answer:
Musya8 [376]3 years ago
5 0

Answer:

The stock price is 38.63

Explanation:

We use the gordon model to calculate the horizon value and with htat the value of the stock:

\frac{D_1}{r-g} = PV\\\frac{D_0(1+g)}{r-g} = PV\\

D1 = 2.60 x 1.04 = 2.704

rate of return 11% = 0.11

grow rate = 4% = 0.04

\frac{2.704}{0.11-0.04} = PV\\

P0 = 38.62857143

The taxes should be ignored as the gordon model do not include them in the calculations

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