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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)?

User Soflare
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1 Answer

7 votes

Answer:

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

User Rajez
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