Ask Question
9 November, 08:05

stock is not expected to pay dividends until three years from now. The dividend is then expected to be $2.00 per share, the dividend payout ratio is expected to be 40%, and the return on equity is expectedto be 15%. If the required rate of return is 12%, the value of the stock today is closest to:

+4
Answers (1)
  1. 9 November, 08:30
    0
    The value of the stock today is closest to $53.15

    Explanation:

    Under the Gordon Growth Model, the share price of share can be calculated as follow

    Price of share = D / (k - g)

    Where:

    D = End of the first period Dividend

    k = Required Rate of Return

    g = Expected growth rate

    g can be calculated as follow

    g = Retention Rate x and ROE

    g = (1 - Dividend Payout Ratio) x ROE

    g = (100% - 40%) x 15% = 60% x 15% = 9%

    D = $2

    k = 12%

    Dividends will start at year 3. This will be after 2 years of the end of the year dividend.

    Year 3 share Price = $2 / (12% - 0.09%)

    Year 3 share Price = $66.67

    Discounting the year 3 share price back to today's value,

    Today's share price = Year 3 share Price / (1 + required ROR) ^n

    Today's share price = 66.67 / (1 + 12%) ^2

    Today's share price = $53.15
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “stock is not expected to pay dividends until three years from now. The dividend is then expected to be $2.00 per share, the dividend payout ...” 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