Question

BioScience Inc. will pay a common stock dividend of $5.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 7 percent. Compute the current price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

The current price of the stock = $74.29

Step-by-step explanation:

Po= Do(1+g)/ke-g

=5.20(1+0.07)/14%-7%

= 5.564/0.07

= $79.4857

The current price of stock = Mv- excluding any dividend currently payable

= $79.4857 - $5.20

= $74.29.

Dividend valuation model assumed that the value of the stock is the sum of the future expected stream of income on the stock discounted at a suitable cost of capital.

It also assumed that all investors will be rational and have the same expectations from the portfolio of an investment. However, this is not always the case in reality.