Question

If ZZZ Co pays $3 per share forever and the required rate of return for the stock is 9%, what is the expected price per share? Please use at least 5 decimal places and do not use $ symbol in the answe

Answer 1

The expected price per share of ZZZ Co can be calculated using the Gordon Growth Model as:

Expected price per share = Dividend per share / (Required rate of return - Dividend growth rate)

Since ZZZ Co pays $3 per share forever, the dividend per share is $3. The required rate of return for the stock is 9%.

To find the dividend growth rate, we can assume that it is equal to the long-term growth rate of the company's earnings or dividends. If this information is not given, we can estimate it based on historical data or industry trends. For the purpose of this calculation, let's assume a dividend growth rate of 3%.

Expected price per share = $3 / (0.09 - 0.03) = $50.00000

Therefore, the expected price per share of ZZZ Co is $50.00000.