Question

What is the value of a stock if the annual dividend is expected to remain unchanged forever at $1.00 per year, the expected rate of return is 15.45% per year, and the next dividend is expected in one year?(Round the value to 100th decimal)

Answer 1

The value of the stock can be calculated using the dividend discount model (DDM) considering the expected rate of return and the expected future dividends. In this case, the value of the stock is approximately $6.47.

Step-by-step explanation:

The value of a stock can be calculated using the dividend discount model (DDM), which takes into account the expected rate of return and the expected future dividends. In this case, the annual dividend is expected to remain unchanged at $1.00 per year and the expected rate of return is 15.45% per year. Using the formula for the DDM, the value of the stock can be calculated as:

Value of Stock = Dividend / (Rate of Return - Growth Rate)

Since the annual dividend is expected to remain unchanged forever, the growth rate is equal to zero. Plugging in the values, we get:

Value of Stock = $1.00 / (0.1545 - 0)

Value of Stock = $1.00 / 0.1545

Value of Stock ≈ $6.47 (rounded to the 100th decimal)