Question

A stock is expected to pay a dividend of $3.45 at the end of the year (this is D1). The required rate of return is rs =13.25%, and the expected constant growth rate is 8%. What is the current stock price?

Answer 1

Using the Gordon Growth Model, the current stock price is calculated as $65.71, based on an upcoming dividend of $3.45, a required rate of return of 13.25%, and a constant growth rate of 8%.

Step-by-step explanation:

The current stock price can be determined using the Gordon Growth Model, which takes into account the upcoming dividend payment, the required rate of return, and the expected constant growth rate of the dividends. The formula for calculating the current stock price (P0) is:

P0 = D1 / (rs - g)

Where P0 is the current stock price, D1 is the dividend expected at the end of the year, rs is the required rate of return, and g is the expected growth rate. Plugging in the values provided:

P0 = $3.45 / (0.1325 - 0.08)

P0 = $3.45 / 0.0525

P0 = $65.71

Therefore, the current stock price is $65.71.