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29 May, 04:56

A company's stock is currently selling for 28.50. Its next dividend, payable one year from now, is expected to be 0.50 per share. Analysts forecast a long-run dividend growth rate of 7.5% for the company. Tomorrow, the long-run dividend growth rate estimate changes to 7%. Calculate the new stock price.

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  1. 29 May, 08:51
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    Answer: $22.22

    Explanation:

    We can use the dividend discount model to solve for this.

    The formula is,

    P = D1 / r - g

    Where,

    D1 = the next dividend

    r = the expected return

    g = the growth rate.

    We do not have the expected return but we can calculate for it using the old stock price and growth rate. Making it x we have,

    28.5 = 0.5 / x - 0.075

    28.5 (x - 0.075) = 0.5

    x = 0.5 / 28.5 + 0.075

    x = 0.09254385964

    x = 9.25 %

    Now that we have the expected return we can calculate the new stock price with the new growth rate,

    P = 0.5 / 9.25% - 7%

    P = 22.2222222222

    P = $22.22

    The new stock price is $22.22
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