Question

Investors require a return of 13 percent on the stock for the first three years, a return of 11 percent for the next three years, and then a return of 9 percent thereafter. What is the current share price for the stock

Answer 1

Complete Question:

BenchMark, Inc., just paid a dividend of $3.45 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent on the stock for the first three years, a return of 11 percent for the next three years, and then a return of 9 percent thereafter. What is the current share price for the stock.

Answer:

BenchMark, Inc.

The current share price for the stock is:

$43.13

Explanation:

a) Data and Calculations:

Dividend per share = $3.45

Growth rate = 5%

Investors' required rate of return = 13%

Stock value = Dividend per share / (Required Rate of Return – Dividend Growth Rate)

= $3.45/(0.13 - 0.05)

= $43.13

b) We can calculate BenchMark's current share price, by dividing the dividend per share by the investors' required rate of return after subtracting the growth rate from the required rate of return.