Question

1. Newco expects to pay its common equity shareholders $0.25 per share this year. The investor anticipates Newco’s stock will close the year at $30 per share. Given a rate of return of 10%, what is the value of Newco's common stock?

Answer 1

The value of Newco's common stock is calculated using the dividend discount model (DDM). Assuming no growth in dividends, the value of the stock is $2.50 per share.

Step-by-step explanation:

To calculate the value of Newco's common stock, we can use the dividend discount model (DDM), which values a company based on the present value of its future dividends.

The formula for the value of a stock using DDM is:

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

In this case, the dividend per share is $0.25, the rate of return is 10%, and there is no information given about the dividend growth rate. Assuming no growth in dividends, the formula becomes:

Stock Value = $0.25 / (0.10 - 0)

Stock Value = $0.25 / 0.10

Stock Value = $2.50

Therefore, the value of Newco's common stock is $2.50 per share.