Answer:
The value of the stock today is $53.50
Step-by-step explanation:
The stock is a constant growth stock which means that the constant growth model of the DDM will be used to calculate the price of the stock today. Under the constant growth model, the price/value of the stock today is,
Price or Value today = D0 * (1+g) / (r - g)
Where,
- D0 * (1+g) is D1 or the dividend expected for the next period.
- r is the required rate of return
- g is the growth rate in dividends
Value today = 2 * (1+0.07) / (0.11 - 0.07)
Value today = $53.5