Question

A stock is expected to pay a dividend of $0.75 in the next year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What should be the fair value of the stock

Answer 1

$18.29

Step-by-step explanation:

From the question above, the dividend payment next year (D1) is $0.75

The required rate of return (rs) is 10.5%

= 10.5/100

= 0.105

The growth rate is 6.4%

= 6.4/100

= 0.064

Therefore, the fair value of the stock can be calculated as follows

Po= D1/(rs-g)

Po= 0.75/(0.105-0.064)

Po= 0.75/0.041

Po= $18.29

Hence the fair value of the stock is $18.29