Question

The CFO of a publicly traded company is expecting to pay a dividend next year of $1.25 and projecting that the price of the company’s stock will be $45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today?

Answer 1

Answer:

$42.604

Explanation:

Using dividend growth model we have D1 = $1.25, dividend at end of year 1

P1 = $45 price at the end of year 1

Ke = 10% Cost of capital or expected return

g = ? the growth rate expected

Thus

D2 = D1 + g

$45 = $\frac{1.25+g}{0.10-g}$

$4.5 - 45g = 1.25 + g

$3.25 = 46g

7.06% = g

Now, using value of g we have

P0 = $\frac{1.25}{0.10-0.0706}$

Current price P0 = $42.604