Question

A firm does not expect to pay dividends in the next four years. beginning five years from today, the firm expects to pay a constant dividend of $4.75 per year forever. investors required rate of return on the firm's stock is 10 percent. what is the price of the stock today?

Answer 1

Given:
dividend: 4.75 per year forever
required rate of return: 10%

Since the dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period. The per-share value is thus given by

P₀ = D/R

P₀ = Price today
D = dividend per year
R = required rate of return

P₀ = 4.75 / 0.10 = 47.50

The price of the stock today is $47.50

Answer 2

From the data given above, the investor required rate of return on the firm's stock is 10% and is equal to $4,75 that is expected to be paid each year.
If $4.75 = 10%, then the price of the stock which is 100% will be equal to $4,75 * 10= $47.50.
Therefore, the current price of the stock is $47.50.