Question

The Boston House increases its dividend each year. The next annual dividend is expected to be $2.25 a share. Future dividends will increase by 5.0 percent annually. What is the current value of this stock if the discount rate is 13 percent?

Answer 1

Current value of stock = $28.125

Step-by-step explanation:

Given:

Annual dividend = $2.25

Growth rate = 5% = 5 / 100 = 0.05

Discount rate = 13% = 13 / 100 = 0.13

Current value of stock = ?

Computation of current value of stock:

Current value of stock = Annual dividend / (Discount rate - Growth rate)

Current value of stock = $2.25 / (0.13 - 0.05)

Current value of stock = $2.25 / (0.08)

Current value of stock = $28.125