Question

Financial analysts forecast L Brands (LB) growth for the future to be 11.4 percent. LB's most recent dividend was $1.20. What is the fair present value of L Brands's stock if the required rate of return is 15.3 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Fair present value

Answer 1

The fair present value of L Brands's stock is calculated using the Gordon Growth Model, incorporating the given dividend, growth rate, and required rate of return.

Step-by-step explanation:

The question deals with the fair present value of L Brands's stock, considering its dividend growth and the required rate of return. To calculate this, the Gordon Growth Model, also known as the Dividend Discount Model (DDM), is employed. According to the model, the fair present value (P) is equal to the most recent dividend (D0), multiplied by (1 + growth rate (g)), and then divided by the difference between the required rate of return (k) and the growth rate (g).

Given the values - D0 = $1.20, g = 11.4%, and k = 15.3%, the formula becomes P = $1.20 * (1 + 0.114) / (0.153 - 0.114), which computes the fair present value for L Brands's stock.