Question

Maxwell Communications paid a dividend of $0.55 last year. Over the next 12 months, the dividend is expected to grow at 10 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1​. The required rate of return (κe​) is 15 percent. Compute the price of the stock (P0​). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Using the dividend discount model (DDM), the price of Maxwell Communications stock should be about $12.10 per share, based on last year's dividend of $0.55, a growth rate of 10%, and the required rate of return at 15%.

Step-by-step explanation:

To compute the price of Maxwell Communications stock (P0), we can use the dividend discount model (DDM) formula, which is P0 = D1 / (ke - g). Given that the dividend last year was $0.55 and is expected to grow at a constant rate (g) of 10%, we get D1 equal to $0.55 * 1.10, which is $0.605. The required rate of return is 15%, so the price of the stock can be calculated as follows:

P0 = $0.605 / (0.15 - 0.10) = $0.605 / 0.05 = $12.10

Therefore, the price of Maxwell Communications stock should be about $12.10 per share.