Question

Hubbard Industries just paid a common dividend, D0, of $2.00. It expects to grow at a constant rate of 3% per year. If investors require a 8% return on equity, what is the current price of Hubbard's common stock

Answer 1

Answer:

The answer is $41.2

Explanation:

This will be solved by Dividend Discount Model which is one of the ways of valuing the price of shareholders' equity.

Here, the future value of dividend payment are discounted using the cost of equity.

Ke = D1/Po + g

Where Ke is the cost of equity

D1 is future dividend payment.

Po is the current share price or stock price

g is the growth rate.

To find the current price of stock price, we need to re write the equation;

Po = D1 ÷ (Ke - g)

D1 = Do x 1.03

= $2 x 1.03

=2.06

Ke = 8% or 0.08

g = 3% or 0.03

So we have;

2.06 ÷ (0.08 -0.03)

$2.06 ÷ 0.05

$41.2