Question

Tresnan Brothers is expected to pay a $1.60 per share dividend at the end of the year (i.e., D1 = $1.60). The dividend is expected to grow at a constant rate of 3% a year. The required rate of return on the stock, rs, is 5%. What is the stock's current value per share? Round your answer to the nearest cent.

Answer 1

The price of the stock today is $80.00

Step-by-step explanation:

The price of a stock whose dividends are expected to grow at a constant rate is calculated by the constant growth model of the DDM. The price of a stock under DDM is based on the present value of the expected future dividends that the stock will pay. The formula for price under this model is,

P0 = D1 / r - g

Where,

• D1 is the dividend expected for the next period
• r is the required rate of return
• g is the growth rate in dividends

P0 = 1.6 / (0.05 - 0.03)

P0 = $80.00