Question

Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. The company earned $1.20 a share last year, and just paid out a dividend of $0.24 per share. Investors believe the company plans to maintain its dividend payout ratio at 20%. ROE equals 22%. Everyone in the market expects this situation to persist indefinitely.What is the market price of Chiptech stock? The required return for the computer chip industry is 18%, and the company has just gone ex-dividend (i.e., the next dividend will be paid a year from now, at t = 1). (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

The market price of Chiptech stock is $1.33 per share.

Step-by-step explanation:

To calculate the market price of Chiptech stock, we need to use the Dividend Discount Model (DDM). DDM calculates the present value of all future dividends, which represents the intrinsic value of the stock. The formula for DDM is:

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

In this case, the dividend payout ratio is 20% and the dividend payment is $0.24 per share. The required return for the industry is 18%. Since the company has just gone ex-dividend, the next dividend will be paid a year from now (t = 1). Therefore, the dividend growth rate is 0%.

Plugging the values into the formula:

Market Price = $0.24 / (0.18 - 0)

Market Price = $0.24 / 0.18

Market Price = $1.33

Therefore, the market price of Chiptech stock is $1.33 per share.