Question

Gilmore, Inc., just paid a dividend of $3.15 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. Assume investors require a return of 11 percent on this stock. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

$66.78

Explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Value of Share = Dividend / (Rate of return - Growth rate)

P0 = D0 ( 1 + g ) / ( r - g )

where

P0 = Value of stock at time 0 / today = ?

D0 = Dividend paid at time 0 / current = $3.15

g = growth rate = 6%

r = rate of return = 11%

Placing all these values in the formula

P0 = $3.15 ( 1 + 6% ) / ( 11% - 6% )

P0 = $3.339 / 5%

P0 = $66.78

Answer 2

Answer:

Price = $66.78

Explanation:

The dividend growth model will be used to calculate the price of stock. The future value of dividend, required rate of return and growth rate will be used to calculate the price of stock.

Price =               Expected Dividend                  

            Required Rate of Return - Growth Rate

Price =      Dividend Paid ( 1 + Growth Rate)      

              Required Rate of Return - Growth Rate

Price =   Do ( 1 + g)

                  r - g

Price =  3.15 * (1 + 0.06)

               0.11 - 0.06

Price = $66.78