Question

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?

Answer 1

Answer:

$26.94

Explanation:

We know,

Current stock price = P0 = $\frac{D1}{ks - g}$

Given,

expected dividend = $3.30

Growth rate, g = 2.75% = 0.0275

Required rate of return, ks = 0.15

Putting the values into the formula, we can get

Current stock price, P0 = $\frac{3.30}{0.15 - 0.0275}$

Or, Current stock price, P0 = $\frac{3.30}{0.1225}$

Therefore, Current stock price, P0 = $26.94