Question

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 3.9 percent indefinitely. The company just paid a dividend of $3.62 and you feel that the required return on the stock is 11.7 percent. What is the price per share of the company's stock

Answer 1

Using the Gordon Growth Model, the price per share of Canyon Echo's stock is calculated to be $46.41, considering a dividend growth rate of 3.9%, a required return of 11.7%, and a dividend just paid of $3.62.

Step-by-step explanation:

To calculate the price per share of Canyon Echo's stock, considering the dividend growth rate and the required return, we use the Gordon Growth Model (or Dividend Discount Model).

Calculating Stock Price with the Gordon Growth Model

The Gordon Growth Model formula is:

Price = Dividend per share / (Required return - Dividend growth rate)

For Canyon Echo:

Dividend just paid: $3.62

Dividend growth rate: 3.9%

Required return: 11.7%

Adjust the growth rate and required return to decimal form:

Growth rate: 0.039

Required return: 0.117

Now plug the values into the model:

Price = $3.62 / (0.117 - 0.039)

Price = $3.62 / 0.078

Price = $46.41

The price per share of Canyon Echo's stock would be $46.41.

Answer 2

$48.2

Step-by-step explanation:

The increase in dividend is 3.9%

= 3.9/100

= 0.039

The recently paid dividend is $3.62

The required return is 11.7%

= 11.7/100

= 0.117

Therefore the price per share of the company stock can be calculated as follows

= 3.62(1+0.039)/0.117-0.039

= 3.62(1.039)/0.078

= 3.761/0.078

= 48.2

Hence the price per share is $48.2