Final answer:
The stock price for Poutine Professionals Inc. is calculated using the Gordon Growth Model, which takes into account the dividend just paid, the growth rate of dividends, and the required return rate. Given a dividend of $0.55, a growth rate of 5%, and a required return of 12.5%, the stock is valued at $7.70 per share.
Step-by-step explanation:
To calculate today's stock price for Poutine Professionals Inc., given that the company has just paid a dividend of $0.55 per share with expected dividend growth at a constant annual rate of 5 percent indefinitely, we can use the Gordon Growth Model (also known as the Dividend Discount Model).
This model can be represented by the formula P = D1 / (k - g) where P is the price of the stock, D1 is the expected dividend next year, k is the required return rate, and g is the growth rate of the dividends.
Using the given values:
- Required return (k): 12.5%
- Dividend just paid (D0): $0.55
- Growth rate (g): 5%
The expected dividend next year (D1) can be calculated as D0 × (1 + g), which would be $0.55 × (1 + 0.05) = $0.5775.
Substituting the values into the formula gives us P = $0.5775 / (0.125 - 0.05) = $0.5775 / 0.075. Therefore, the stock price is $7.70 per share.