Question

The Lo Company earned $2.60 per share and paid a dividend of $1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock if the required rate of return is 12 percent.

Answer 1

Answer:

Price of stock is $18.57

Explanation:

Dividend growth method measures the stock value by taking sum of present value of all future cash flows means present value of all future dividends.

Use following formula to calculate the price of stock

Price = Dividend / Rate of return - Growth rate

According to given data

Dividend = $1.30

Required rate of return = 12%

Growth rate = 5%

Price = $1.3 / ( 12% - 5% )

Price = $1.3 / 7%

Price = $18.57