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3 September, 13:29

A firm does not expect to pay dividends in the next four years. beginning five years from today, the firm expects to pay a constant dividend of $4.75 per year forever. investors required rate of return on the firm's stock is 10 percent. what is the price of the stock today?

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  1. 3 September, 13:46
    0
    Given:

    dividend: 4.75 per year forever

    required rate of return: 10%

    Since the dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period. The per-share value is thus given by

    P₀ = D/R

    P₀ = Price today

    D = dividend per year

    R = required rate of return

    P₀ = 4.75 / 0.10 = 47.50

    The price of the stock today is $47.50
  2. 3 September, 13:55
    0
    From the data given above, the investor required rate of return on the firm's stock is 10% and is equal to $4,75 that is expected to be paid each year.

    If $4.75 = 10%, then the price of the stock which is 100% will be equal to $4,75 * 10 = $47.50.

    Therefore, the current price of the stock is $47.50.
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