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sladkih [1.3K]
3 years ago
9

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.6 percent indefinitely

. The company just paid a dividend of $3.41 and you feel that the required return on the stock is 11 percent. What is the price per share of the company's stock?
Business
1 answer:
MAXImum [283]3 years ago
6 0

price per share of the company's stock is $53.28

Explanation:

Under dividend growth model a stock is overvalued or undervalued assuming that the firm’s expected dividends grow at a value g forever, which is subtracted from the required rate of return or k.

Therefore, the stable dividend growth model formula calculates the fair value of the stock as P =D1 / ( k – g ).

P= price per share

D1 = current dividend

k = required return

g = growth rate

P= $3.41 ÷ (11 %  - 4.6% ) =( 3.41 ÷ 0.064 )=  $53.28

P= $3.41 ÷ (0.11  - 0.046 ) =( 3.41 ÷ 0.064 )=  $53.28

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