Question

A stockjust paid a dividend of $0,00. That number represents "D0". Future dividends will grow at a constant 4% every year thereafter. If the stock's required rate of return is 10.4%, what is a fair price for the stock today? Round your answer to the nearest penny.

Answer 1

The fair price for the stock today is $0.00 according to the Dividend Discount Model (DDM).

Step-by-step explanation:

To calculate the fair price for the stock today, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula for the DDM is:

P0 = D0 * (1 + g) / (r - g)

Where:

• P0 is the fair price of the stock today
• D0 is the dividend just paid, which is $0.00 in this case
• g is the growth rate of future dividends, which is 4% in this case
• r is the required rate of return for the stock, which is 10.4% in this case

Plugging in these values, we get:

P0 = 0 * (1 + 0.04) / (0.104 - 0.04)

Simplifying the equation, we find that the fair price for the stock today is $0.00.