Question

Stoneheart Group is expected to pay a dividend of $3.17 next year. The company's dividend growth rate is expected to be 3.9 percent indefinitely and investors require a return of 11.7 percent on the company's stock. What is the stock price?

Answer 1

Answer:

The price of the stock= 40.64

Explanation:

According to the dividend growth model, the price of a stock is the present value of expected dividend discounted at the required rate of return.

This is done as follows:

Price of a stock = D×(1+r)/(r-g)

D(1+g) - Dividend for next year = 3.17

g- growth rate - 3.9%

r- required rate of return - 11.7%

P = 3.17/(0.117- 0.039)=40.641

The price of the stock= 40.64