Question

A company is expected to pay a dividend of $2.50 per share next year. The dividends are expected to grow at 4.5% per year indefinitely. If the required return on similar investments is 7%, what is the current price of the stock?

Answer 1

The current price of the stock is $50 per share.

To calculate the current price of the stock, we can use the Gordon Growth Model. According to this model, the price of the stock is equal to the dividend expected to be paid next year divided by the difference between the required return and the growth rate. In this case, the dividend expected next year is $2.50 per share, the required return is 7%, and the growth rate is 4.5%. Using these values, we can calculate the current price of the stock:

Price of Stock = $2.50 / (0.07 - 0.045) = $50

Therefore, the current price of the stock is $50 per share.