Question

Constant growth: Moriband Corp. paid a dividend of $2.15 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the next several years. If stocks of companies like Moriband require a rate of return of 15 percent, what should be the market price of Moribund stock?

Answer 1

$22.6

Step-by-step explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

As per given data

Dividend = $2.15

Growth rate = 5%

Discount rate = 15%

Formula to calculate the value of stock

Price = Dividend ( 1 + growth rate ) / ( Rate or return - growth rate )

Price = $2.15 ( 1 + 5% ) / ( 15% - 5% )

Price = $2.15 (1.05) / (0.15 - 0.05 )

Price = $2.26 / 0.10

Price = $22.6

Answer 2

Answer:

The market price of moribund stock is $22.58

Step-by-step explanation:

Let,

Dividend = D0 = $2.15

Growth rate = g = 5%

rate of return = R = 15%

Market price = P0 = D1 ÷ (R - g)

= D0 (1 + g) ÷ (R - g)

= $2.15(1 + 0.05) ÷ 0.15 - 0.05

= $2.15(1.05) ÷ 0.1

= $2.2575 ÷ 0.1

= $22.575

Approximately $22.58

The market price for moribund stock is $22.58