A firm just paid an annual dividend of $1.00 today. The dividend is expected to growth at a rate of 14% for the next three years, and then 6% thereafter. The required rate of return on this stock is 9%. What is the value of this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i. e. If your answer were $1.23, then type 1.23 without a $ sign)

Question

Business

Silvester

27 September, 10:43

A firm just paid an annual dividend of $1.00 today. The dividend is expected to growth at a rate of 14% for the next three years, and then 6% thereafter. The required rate of return on this stock is 9%. What is the value of this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i. e. If your answer were $1.23, then type 1.23 without a $ sign)

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Answers (1)

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Laila · Answer 1

Value of stock is $49.33

Explanation:

Dividend valuation method is used to calculate the the value of stock based on the dividend paid, its growth rate and rate of return.

Calculate dividend after 3 years first

Current Dividend = D0 = $1

Dividend after 3 year = D3 = D0 (1 + g) ^n = $1 (1 + 0.14) ^3 = $1.48

Rate of return = r = 9%

Growth = g = 6%

DVM Formula for stock value

Price = Dividend / Rate of return - Growth rate

Price of stock = D3 / (r - g) = $1.48 / (9% - 6%) = $1.48 / 3% = $49.33