You are considering purchasing stock. The stock is expected to pay a dividend of $87 per share. The consensus of investors is that these dividends will increase at a rate of 3 percent per year for indefinate future, and the interest rate is 7 percent. The price of stock should be ___.

Question

Stella Oconnell

Business

25 December, 02:08

You are considering purchasing stock. The stock is expected to pay a dividend of $87 per share. The consensus of investors is that these dividends will increase at a rate of 3 percent per year for indefinate future, and the interest rate is 7 percent. The price of stock should be ___.

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Answers (1)

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Natalya Farley · Answer 1

The price of stock should be $2,175

Explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Formula to calculate the value of stock

Price = Dividend / (Rate or return - growth rate)

Price = $87 / (7% - 3%)

Price = $87 / 0.07 - 0.03)

Price = $87 / 0.04

Price = $2,175