Question

Assume that IBM is expected to pay a total cash dividend of $5.60 next year and that dividends are expected to grow at a rate of 5% per year forever. Assuming annual dividend payments, what is the current market value of a share of IBM stock if the required return on IBM common stock is 10%?

Answer 1

Answer: $112

Explanation:

The following information can be gotten from the question:

Growth Rate = 5%

Dividend at end of year,D1 = 5.60

Required return, ke = 10%

Then, the current market value will be:

P0 = De/(ke-g)

= 5.60/(10% - 5%)

= 5.60 / 5%

= 5.60/0.05

= $112

Therefore, the current market value of a share of IBM stock is $112.