Question

Sharbaugh Inc.'s most recent dividend was $2.0 per share. the dividend is expected to grow at a rate of 4% per year for the foreseeable future. if the market return is 13% on investments with comparable risk, what should the stock sell for today?

Answer 1

The stock should sell for $22.22 per share today.

Step-by-step explanation:

To determine the price of the stock today, we can use the Dividend Discount Model (DDM). The DDM values a stock by calculating the present value of all future dividends.

In this case, since the dividend is expected to grow at a rate of 4% per year, we can use the formula:

Stock Price = Dividend / (Required Return - Growth Rate)

Given that the most recent dividend is $2.0 per share, and the market return is 13%, we plug these values into the formula:

Stock Price = $2.0 / (0.13 - 0.04) = $2.0 / 0.09 = $22.22 per share