Question

Pharsalus Inc. just paid a dividend (i.e., D0) of $ 2.49 per share. This dividend is expected to grow at a rate of 3.4 percent per year forever. The appropriate discount rate for Pharsalus's stock is 12.4 percent. What is the price of the stock?

Answer 1

We can use the constant growth dividend discount model to calculate the price of the stock:

P0 = D1 / (r - g)

where:

D1 = D0 x (1 + g) = $2.49 x (1 + 0.034) = $2.574

r = 12.4% (the required return or discount rate)

g = 3.4% (the expected growth rate)

Plugging in the values, we get:

P0 = $2.574 / (0.124 - 0.034) = $27.545

Therefore, the price of the stock is $27.545 per share.

Step-by-step explanation: