Question

Red, Incorporated, Yellow Corporation, and Blue Company each will pay a dividend of $4.15 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company's stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company?

(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Using the Dividend Discount Model, the stock prices are $103.75 for Red, Incorporated, $59.29 for Yellow Corporation, and $41.50 for Blue Company. The required returns influence each company's stock price differently.

Step-by-step explanation:

The stock price for each company can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model), which determines the present value of an infinite series of future dividends that are expected to grow at a constant rate. According to this model, the formula to calculate the stock price (P) is:

P = D1 / (r - g)

Where D1 is the dividend next year, r is the required rate of return, and g is the dividend growth rate.

1. For Red, Incorporated:

P = $4.15 / (0.08 - 0.04) = $103.75

1. For Yellow Corporation:

P = $4.15 / (0.11 - 0.04) = $59.29

1. For Blue Company:

P = $4.15 / (0.14 - 0.04) = $41.50

Answer 2

The stock price for Red, Yellow, and Blue companies are $103.75, $69.17, and $51.88, respectively.

Step-by-step explanation:

A stock price is the current market value of a share of a publicly traded company. Determined by supply and demand in the stock market, stock prices fluctuate based on various factors, including company performance, economic conditions, and investor sentiment. To determine the stock price for each company, we can use the Gordon Growth Model, also known as the dividend discount model. The formula for the stock price is:

Stock Price = Dividend / (Required Return - Growth Rate). Applying this formula to each company:

• Red, Incorporated: Stock Price = $4.15 / (0.08 - 0.04) = $103.75
• Yellow Corporation: Stock Price = $4.15 / (0.11 - 0.04) = $69.17
• Blue Company: Stock Price = $4.15 / (0.14 - 0.04) = $51.88