Question

Boehm Incorporated is expected to pay a $2.70 per share dividend at the end of this year (i.e., D1 = $2.70). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock, rs, is 10%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

The expected value per share today is $54

Step-by-step explanation:

The price or expected value of a stock whose dividends are expected to grow at a constant rate can be calculated using the constant growth model of the DDM or dividend discount model. The DDM bases the value of a stock on the present value of the expected future dividends from the stock. The formula for price under this model is,

P0 = D1 / r - g

Where,

• D1 is the dividend for the next period
• r is the cost of equity or rate of return
• g is the growth rate in dividends

P0 = 2.7 / (0.1 - 0.05)

P0 = $54