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10 October, 15:48

The Boston House increases its dividend each year. The next annual dividend is expected to be $2.25 a share. Future dividends will increase by 5.0 percent annually. What is the current value of this stock if the discount rate is 13 percent?

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  1. 10 October, 15:49
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    Current value of stock = $28.125

    Explanation:

    Given:

    Annual dividend = $2.25

    Growth rate = 5% = 5 / 100 = 0.05

    Discount rate = 13% = 13 / 100 = 0.13

    Current value of stock = ?

    Computation of current value of stock:

    Current value of stock = Annual dividend / (Discount rate - Growth rate)

    Current value of stock = $2.25 / (0.13 - 0.05)

    Current value of stock = $2.25 / (0.08)

    Current value of stock = $28.125
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