Question

A firm will pay a dividend of $3.90 next year. The dividend is expected to grow at a constant rate of 4.94% forever and the required rate of return is 13.01%. What is the value of the stock? Answer format: Currency: Round to: 2 decimal places.

Answer 1

The value of the stock, computed using the Gordon Growth Model with a dividend of $3.90, a growth rate of 4.94%, and a required rate of return of 13.01%, is $48.33.

Step-by-step explanation:

The value of the stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model), which finds the present value of an infinite series of future dividends that are expected to grow at a constant rate. The formula for this model is given by P = D / (k - g), where P is the price of the stock, D is the dividend next year, k is the required rate of return, and g is the growth rate of the dividend.

Here, the dividend (D) is $3.90, the growth rate (g) is 4.94%, and the required rate of return (k) is 13.01%. Utilizing these values, the calculation is P = 3.90 / (0.1301 - 0.0494) = 3.90 / 0.0807, which gives P = $48.33 as the value of the stock, rounded to two decimal places.