Ask Question
14 December, 02:52

A firm just paid an annual dividend of $1.00 today. The dividend is expected to growth at a rate of 14% for the next three years, and then 6% thereafter. The required rate of return on this stock is 9%. What is the value of this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i. e. If your answer were $1.23, then type 1.23 without a $ sign)

+2
Answers (1)
  1. 14 December, 03:06
    0
    Value of stock is $49.33

    Explanation:

    Dividend valuation method is used to calculate the the value of stock based on the dividend paid, its growth rate and rate of return.

    Calculate dividend after 3 years first

    Current Dividend = D0 = $1

    Dividend after 3 year = D3 = D0 (1 + g) ^n = $1 (1 + 0.14) ^3 = $1.48

    Rate of return = r = 9%

    Growth = g = 6%

    DVM Formula for stock value

    Price = Dividend / Rate of return - Growth rate

    Price of stock = D3 / (r - g) = $1.48 / (9% - 6%) = $1.48 / 3% = $49.33
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “A firm just paid an annual dividend of $1.00 today. The dividend is expected to growth at a rate of 14% for the next three years, and then ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers