Gilmore, Inc., just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 6.25 percent per year, indefinitely. Assume investors require a return of 12 percent on this stock. What is the current price?

Question

Darrell Hatfield

Business

7 June, 20:31

Gilmore, Inc., just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 6.25 percent per year, indefinitely. Assume investors require a return of 12 percent on this stock. What is the current price?

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Answers (1)

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Marisol Davila · Answer 1

The current price is $55.65 as computed below.

Explanation:

The current price of the stock can be computed using the below formula:

Price=dividend / (rate of return-growth rate)

price=$3.20 / (0.12-0.0625)

Price=$55.65

The stock of Jerome can be priced at $55.65 based on the fact that it offers return of 12% and the return is expected to grow at 6.25% in perpetuity.

This return shows that the actual return on shares is dividend dividend yield as well as gains yield. Dividend is the return on the share based on dividends receivable from the share, while gains yield stem from share price appreciation