Question

Thomas brothers is expected to pay a $1.4 per share dividend at the end of the year (that is, d1 = $1.4). the dividend is expected to grow at a constant rate of 7% a year. the required rate of return on the stock, rs, is 18%. what is the stock's current value per share? round your answer to two decimal places.

Answer 1

To determine the current value of a share of Thomas Brothers stock, the dividend discount model is used, considering the expected dividend of $1.4, growth rate of 7%, and required return of 18%. The calculated value comes to approximately $12.73 per share.

Step-by-step explanation:

The question regarding Thomas Brothers stock involves determining the current value of a share using the dividend discount model. As stated, the company is expected to pay a $1.4 per share dividend at the end of the year, with the dividend expected to grow at a constant rate of 7% a year. The required rate of return on the stock, RS, is 18%. The formula to calculate the stock's current value per share is: P0 = D1 / (rs - g), where P0 is the current stock price, D1 is the dividend one year from now, rs is the required rate of return, and g is the growth rate in dividends.

Inputting the given numbers:

• D1 = $1.4
• rs = 18%
• g = 7%

We calculate as follows:

P0 = $1.4 / (0.18 - 0.07)

P0 = $1.4 / 0.11

P0 = $12.73

Therefore, the current value of a stock from Thomas Brothers would be approximately $12.73 per share, rounded to two decimal places.