Question

Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

Answer 1

The price of a share of Charlie Company should be $37.

Step-by-step explanation:

To calculate the price of a share of Charlie Company, we can use the Gordon Growth Model, which is a formula used to estimate the value of a stock based on its expected future dividends.

The formula for the Gordon Growth Model is: P = D / (r - g), where P is the price of the stock, D is the expected dividend, r is the required return, and g is the growth rate of the dividend.

In this case, the dividend per share is $1.85 and the growth rate is 6%. The required return is given as 11%. Using these values in the Gordon Growth Model, we can calculate the price of a share of Charlie Company as follows:

P = $1.85 / (0.11 - 0.06) = $1.85 / 0.05 = $37.

Therefore, a share of Charlie Company should sell for $37.