Question

A firm has a steady growth rate of 5% per year in its dividend and this growth rate is expected to continue indefinitely. Last year's dividend was $1.20. If the investor requires a 9% return, what is the value of this stock

Answer 1

the value of the stock is $31.50

Step-by-step explanation:

The computation of the value of the stock is shown below

As we know that

The value of the stock is = Dividend × (1 + growth rate) ÷ (required rate of return - growth rate)

= $1.20 × (1 + 0.05) ÷ (9% - 5%)

= $31.50

hence, the value of the stock is $31.50

We simply applied the above formula