Question

The Delta Manufacturing Company has a marginal tax rate of 21 %. The last dividend paid by Delta was $2.60. The expected long-run growth rate is 4%. If investors require 11% rate of return, what is the current price of the stock (P0)?

Answer 1

The stock price is 38.63

Step-by-step explanation:

We use the gordon model to calculate the horizon value and with htat the value of the stock:

`(D_1)/(r-g) = PV\\(D_0(1+g))/(r-g) = PV\\`

D1 = 2.60 x 1.04 = 2.704

rate of return 11% = 0.11

grow rate = 4% = 0.04

`(2.704)/(0.11-0.04) = PV\\`

P0 = 38.62857143

The taxes should be ignored as the gordon model do not include them in the calculations