Question

A firm has experienced a constant annual rate of dividend growth of 7 percent on its common stock and expects the dividend per share in the coming year to be $2.40. The required rate of return on the stock is 12 percent. The value of the firm's common stock is ________.

Answer 1

The value of the firm's common stock is $48

Step-by-step explanation:

The constant dividend growth model is used to determine the market value of the share and which can be expressed as:

`P = (D)/(r-g)`

here;

the value of the current market price of the share (P) = unknown?

The dividend expected in the next year (D) = $2.40

The required rate of return (r) = 12% = 0.12

The growth rate (g) = 7& = 0.07

Replacing the values into the above equation:

`P = (2.40)/(0.12-0.07)`

`P = (2.40)/(0.05)`

P = $48