Question

Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.30. It expects to grow at a constant rate of 2% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Current price is equal to $16.575

Step-by-step explanation:

It is given common dividend
`D_0=1.30`

Growth rate = 2% = 0.02

Required rate of return = 10% = 0.1

Dividend paid in next year

`D_1=D_0(1+g)=1.30* 1.02=1.326`

Current price is given by
`P_0=(D_1)/(R_e-g)`

`P_0=(1.326)/(0.1-0.02)=16.575`

Therefore current price is equal to $16.575