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 8% a year. the required rate of return on the stock, rₛ, is 16%. what is the stock's current value per share? round your answer to the nearest cent.

Answer 1

The current value per share of Tresnan brothers, calculated using the Gordon Growth Model with a $3.00 end-of-year dividend, an 8% growth rate, and a 16% required rate of return, is $37.50.

Step-by-step explanation:

To determine the value of a stock using the dividend growth model, we need to take into account the dividend that will be paid (D₁), the growth rate of the dividend (g), and the required rate of return (rₛ). Given that the Tresnan brothers are expected to pay a $3.00 dividend per share at the end of the year, with an expected constant growth rate of 8%, and a required rate of return of 16%, we can use the Gordon Growth Model formula:

Value = D₁ / (rₛ - g)

Value = $3.00 / (0.16 - 0.08)

Value = $3.00 / 0.08

Value = $37.50

Thus, the current value per share of Tresnan brothers would be $37.50.

The use of this model assumes that the dividend growth rate will not change, and that the required rate of return is based on the risk associated with the stock compared to other investments. However, it's important to note that the model is more accurate for companies with stable dividend policies and growth rates.