Question

A firm will pay a dividend of $2.21 next year. The dividend is

expected to grow at a constant rate of 4.44% forever and the
required rate of return is 14.22%. What is the value of the
stock?

Answer 1

The value of the stock is $21.08 per share the value of the stock is $21.08 per share.

Step-by-step explanation:

To calculate the value of a stock, we can use the Gordon Growth Model, which is a formula used to value a stock that is expected to grow at a constant rate. The formula is:

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

In this case, the dividend is $2.21, the required rate of return is 14.22%, and the dividend growth rate is 4.44%. Plugging these values into the formula, we get:

Value of Stock = 2.21 / (0.1422 - 0.0444) = 21.078

Therefore, the value of the stock is $21.08 per share.