Question

Tresnan Brothers is expected to pay a $3.00 per share dividend at the end of the year (i.e., D₁ = $3.00). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, rₛ, is 17%. What is the stock's current value per share?

Answer 1

The current value per share of Tresnan Brothers stock is $37.50, calculated using the Gordon Growth Model formula P = D1 / (rs - g) with the given data: a dividend of $3.00, a growth rate of 9%, and a required rate of return of 17%.

Step-by-step explanation:

To determine the current value per share of Tresnan Brothers stock, we use the Gordon Growth Model which assumes dividends grow at a constant rate indefinitely. The model's formula is P = D1 / (rs - g), where P is the price of the stock, D1 is the dividend next year, rs is the required rate of return, and g is the growth rate. To calculate the current value per share of the Tresnan Brothers stock, we can use the Gordon Growth Model. This model is used to value stocks that have a constant growth rate in dividends. The formula for the Gordon Growth Model is:

Stock Value = D₁/(rₛ - g)

Where: D₁ is the dividend expected to be paid at the end of the year ($3.00), rₛ is the required rate of return on the stock (17%), and g is the growth rate of dividends (9%).

Using the given data: D1 = $3.00, rs = 17%, and g = 9%, we calculate the stock's value:

P = $3.00 / (0.17 - 0.09) = $3.00 / 0.08 = $37.50

So, the current value per share of Tresnan Brothers stock is $37.50.