Question

State Street Corp. will pay a dividend on common stock of $4.80 per share at the end of the year. The required return on common stock is 13.2%. The firm has a constant growth rate of 7.2%. Compute the current price of the stock (Po).

Answer 1

Explanation:

The price of a stock (Po) is the present value of all future dividends discounted at the required return, plus the present value of the expected price at the end of the holding period. We can use the constant growth dividend discount model to calculate the price of the stock as follows:

Po = D1 / (r - g)

Where:

Po = the current price of the stock

D1 = the expected dividend per share at the end of the current year

r = the required return on the stock

g = the constant growth rate of the dividend

Using the given information, we can calculate the current price of the stock as follows:

D1 = $4.80 per share (given)

r = 13.2% = 0.132 (given)

g = 7.2% = 0.072 (given)

Substituting these values in the formula, we get:

Po = $4.80 / (0.132 - 0.072) = $4.80 / 0.06 = $80

Therefore, the current price of the stock is $80 per share.