Question

Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 5 $1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 13%. What is the estimated value per share of Boehm’s stock?

Answer 1

Using the Gordon Growth Model, the estimated value per share of Boehm’s stock is calculated to be approximately $21.43, based on a dividend of $1.50, a growth rate of 6%, and a required rate of return of 13%.

Step-by-step explanation:

To estimate the value per share of Boehm’s stock, one can use the Gordon Growth Model since the dividend payments are expected to grow at a constant rate. This model is represented by the formula P = D1 / (rs – g), where P is the price of the stock, D1 is the dividend at the end of the first year, rs is the required rate of return, and g is the growth rate of the dividends.

For Boehm Incorporated, the following values are given:

D1 = $1.50

rs = 13%

g = 6%

Plugging these values into the Gordon Growth Model, we get:

P = $1.50 / (0.13 - 0.06)

P = $1.50 / 0.07

P = $21.43 per share

Thus, the estimated value per share of Boehm’s stock is approximately $21.43.

Answer 2

Answer: The estimated price of the stock is $22.71

Step-by-step explanation:

The divident growth model calculates the fair price of the stock.

The formula is,

P = D1 / ( k – g )

where,

P = Price of the stock

k = Required rate of return = 13%

g = Constant growth rate = 6%

`D_(0)` = Dividend at the end of year 0 = $1.5

`D_(1)` = Dividend at the end of year 1 =
`D_(0)` ( 1+g) = 1.5(1.06) =$1.59

P = $1.59 / ( 0.13 - 0.06 ) = $22.71