Question

Gruber Corp. pays a constant $7.55 dividend on its stock. The company will maintain this dividend for the next 15 years and will then cease paying dividends forever. The required return on this stock is 11 percent. What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The current share price is $54.29

Explanation:

Hi, to find the price of this share, we need to bring to present value all the future cash flow that this share will provide. Since the dividend is a constant dividend, we can find the price using the following equation.

$Price=\frac{Div((1+r)^{n}-1) }{r(1+r)^{n} }$

where:

r= required rate of return of the stock

Div = constant dividend (in our case, $7.55

n = years in which the share will provide dividends

Everything should look like this

$Price=\frac{7.55((1+0.11)^{15}-1) }{0.11(1+0.11)^{15} }=54.29$

So, the price of the stock today would be $54.29

Best of luck.