(Related to Checkpoint 10.1) (Common stock valuation) Header Motor, Inc., paid a $2.71 dividend last year. At a constant g

Question

Strike441 [17]

4 years ago

8

(Related to Checkpoint 10.1) (Common stock valuation) Header Motor, Inc., paid a $2.71 dividend last year. At a constant g

rowth rate of 5 percent, what is the value of the common stock if the investors require a 15 percent rate of return?

Business

1 answer:

zhuklara [117] · Answer 1 · 2021-12-21T08:06:19+03:00

Answer:

The value of the common stock today is $28.455 per share.

Explanation:

For a stock that is paying constant growth rate in dividends, we use the constant growth model of the DDM to calculate the value of stock today. The formula for price using the constant growth model is,

Price = D1 / r - g

Where,

D1 is the dividend expected in the next period or D0 * (1+g)
r is the cost of equity or required rate of return
g is the growth rate in dividends

Price = 2.71 * ( 1 + 0.05 ) / (0.15 - 0.05)

Price = $28.455

​(Related to Checkpoint​ 10.1) ​(Common stock valuation​) Header​ Motor, Inc., paid a ​$2.71 dividend last year. At a constant g

(Related to Checkpoint 10.1) (Common stock valuation) Header Motor, Inc., paid a $2.71 dividend last year. At a constant g