Question

A firm will pay a dividend of $2.59 next year. The dividend is expected to grow at a constant rate of 2.52% forever and the required rate of return is 10.21%. What is the value of the stock?

Answer 1

The value of the stock is $34.04

Step-by-step explanation:

To calculate the value of the stock, we can use the Gordon Growth Model. According to the model, the value of a stock is equal to the dividend received divided by the difference between the required rate of return and the dividend growth rate. In this case, the dividend is $2.59 and it is expected to grow at a rate of 2.52%. The required rate of return is 10.21%.

Using the formula: Value of Stock = Dividend / (Required Rate of Return - Dividend Growth Rate), we can calculate the value of the stock as:

Value of Stock = $2.59 / (0.1021 - 0.0252)

Value of Stock = $34.04