Question

Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s current value per share?

Answer 1

CurrentStock Value per Share (P0) = $6.25

Step-by-step explanation:

Dividend growth rate (g) = 7% per year

Expected Dividend (D1) = $0.50

Required return rate (R) = 15%

CurrentStock Value (P0) = D1 / (R-g)

P0 = $0.50 / (0.15 – 0.07)

= $0.50 / 0.08

= $6.25

CurrentStock Value per Share (P0) = $6.25