Question

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?

Answer 1

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

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