A firm has experienced a constant annual rate of dividend growth of 7 percent on its common stock and expects the dividend per s
1 answer:
Answer:
The value of the firm's common stock is $48
Explanation:
The constant dividend growth model is used to determine the market value of the share and which can be expressed as:
here;
the value of the current market price of the share (P) = unknown?
The dividend expected in the next year (D) = $2.40
The required rate of return (r) = 12% = 0.12
The growth rate (g) = 7& = 0.07
Replacing the values into the above equation:
P = $48
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Answer:
There's an error in the numbers for this question; I found the correct one and pasted it below;
"Great Lakes Steel Supply is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $1.30 per share but all future dividends will be decreased by 2.75 percent annually. What is a share of this stock worth today at a required return of 15.5 percent? "
Explanation:
Use dividend discount model (DDM) to calculate the stock price
whereby,
P0 = Current price
D0 = Last dividend paid = 130
g = growth rate = -275% or -2.75 as a decimal
r = required return = 155% or 1.55 as a decimal
Next, plug in the numbers to the DDM formula above;
Therefore this stock is worth $6.93