Question

Suppose the curent dividends on a stock are $3.7 per share and dividends are expected to increase by 2% per year, forever. If the required rate of retum is 8%, what is the value of the stock? (round your answer to 2 decimal places)

Answer 1

Answer: To calculate the value of the stock, we can use the dividend discount model (DDM) formula. The DDM formula is given by:

Value of Stock

=

Dividend

Required Rate of Return

−

Dividend Growth Rate

Value of Stock=

Required Rate of Return−Dividend Growth Rate

Dividend

​

Given:

Current dividends (D0) = $3.7 per share

Dividend growth rate (g) = 2%

Required rate of return (r) = 8%

Let's substitute the values into the formula:

Value of Stock

=

3.7

0.08

−

0.02

Value of Stock=

0.08−0.02

3.7

​

Simplifying the denominator:

Value of Stock

=

3.7

0.06

Value of Stock=

0.06

3.7

​

Calculating the division:

Value of Stock

=

61.67

Value of Stock=61.67

Rounded to 2 decimal places, the value of the stock is approximately $61.67 per share.

Step-by-step explanation: