Question

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?a. $17.39b. $17.84c. $18.29d. $18.75e. $19.22

Answer 1

The answer is option (c). $18.29

Step-by-step explanation:

The expression for calculating the required rate of return can be used to determine the current price of the stock as follows:

RRR=(EDP/SP)+DGR

where;

RRR=required rate of return

EDP=expected dividend payment

SP=share price

DGR=dividend growth rate

In our case:

RRR=10.5%=10.5/100=0.105

EDP=$0.75

SP=unknown

DGR=6.4%=6.4/100=0.064

replacing in the original expression;

0.105=(0.75/SP)+0.064

0.105-0.064=(0.75/SP)

0.041=(0.75/SP)

0.041 SP=0.75

SP=0.75/0.041

SP=18.29

The current stock price= $18.29