Question

You have taken a job as an entry-level analyst, and your boss has asked you to find the expected value of Adams Furniture’s stock. As you were doing your research, you found out that Adams Furniture just paid a dividend ( D0D0 ) of $3.20. The firm has experienced consistent growth of 5% for the last couple of years, and you believe that the firm will continue to grow at the same rate in the future. If investors require a return of 10% on Adams Furniture’s stock, what is the expected value of the company’s stock? $73.92 $67.20 $60.48 $53.76

Answer 1

Answer:

$67.20

Explanation:

Given:

Dividends paid, D₀ = $3.20

Growth rate = 5%

Required return rate = 10%

Now,

The expected value of the company’s stock

= $\frac{\textup{Last dividend( 1 + growth rate)}}{\textup{required return-growth rate}}$

on substituting the respective values, we have

= $\frac{\ 3.20\times(1+0.05)}{\textup{0.1-0.05}}$

or

= $67.20

Hence, The correct answer is option $67.20