Question

plans to retain and reinvest all of its earnings for the next 30 years. beiginning in year 31, the firm will begin to pay $12 per share dividend. the dividend will increase at a 6% rate annually thereafter. given a required return of 15% what the stock should sell for today

Answer 1

The stock should sell for = $2.01

Step-by-step explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the worth of an asset is the sum of the present values of its future cash flows discounted at the required rate of return.

The model is given as

P = D× g/(r-g)

P- stock value, g- growth rate , r-m required rate of return

PV of dividend in year 30 = 12/(0.15- 0.06)=133.3333333

PV of dividend in year in year 0 = 133.3333333 × 1.15^(-30)= 2.01

The stock should sell for = $2.01