A share of common stock just paid a dividend (D0) of $1.50. If the expected long-run growth rate for this stock is 5%, and if investors' required rate of return is 11.5%, what is the current stock price?

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Business

Dominique Guzman

9 September, 05:22

A share of common stock just paid a dividend (D0) of $1.50. If the expected long-run growth rate for this stock is 5%, and if investors' required rate of return is 11.5%, what is the current stock price?

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Answers (1)

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Camryn Shepard · Answer 1

Current stock price = $24.23

Explanation:

Stock price under Discounted Model:

P0 = D1 / div (Ke - g)

P0 = Current Market price of the share

g = Growth rate = 5.0%

Ke = Cost of equity = 11.5% p. a

D1 = Expected dividend = $1.50 (1 + 0.05) = $1.575

P0 = $1.575 / (11.50% - 5.0%)

Current stock price = $24.23