Question

Chris Anderson is interested in purchasing the common stock of Wildhorse, Inc., which is currently priced at $37.30. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 6.95 percent

(a) What should the market value of the stock be if the required rate of return is 14 percent? (Round answer to 2 decimal places e-g. 15.20.) $ Market value of stock

Answer 1

The market value of the stock is $36.60

Step-by-step explanation:

The formula relevant to computing the market value of the stock is given as

Price=Dividend/(return rate-growth rate)

Dividend=$2.58

return rate =14%

growth rate =6.95%

Price=$2.58/(14%-6.95%)=36.59574468

Approximately $36.60

The market price forecast is based on the dividend yield and gains yield attributable to the stock in the future.

Besides, a stock that promises higher dividend yield and gains yield would priced higher by investors owing to its high returns capacity while the reverse is the case for a stock with lower returns.

No wonder the stocks of companies like Apple is highly priced,even from their first day of listing on the stock exchange.