Question

Free Motion Enterprises just paid an annual dividend of $3.71 per share. Dividends are expected to increase by 3.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 13.7 percent?

Answer 1

$38.68

Step-by-step explanation:

The worth of the stock to a rational investor today can be determined using the below stock price formula:

stock price=Do*(1+g)/Ke-g

Do is the dividend that has just been paid

g is the growth rate of dividend which is 3.75%

Ke is the investor's required rate of return

stock price=3.71*(1+3.75%)/(13.7%-3.75%)

Stock price=$38.68