Question

he Lo Company earned $2.60 per share and paid a dividend of $1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock if the required rate of return is 12 percent.

Answer 1

The value of the stock is $19.50

Step-by-step explanation:

Hi, let´s check out the formula that we need to use in order to find the price of this stock.

`Price=(Do(1+g))/(r-g)`

Where:

Do= last dividend (in our case, $1.30)

g = growth rate of the dividend (in our case, 5% or 0.05)

r = required rate of return (in our case, 12% or 0.12)

Everything should look like this:

`Price=(1.30(1+0.05))/(0.12-0.05) =19.50`

Therefore, the value of this stock is $19.50

Best of luck.