Question

What is the stock price per share for a stock that has a required return of 12%, an expected annual dividend of $3.15 per share in the first year, and a constant (sustainable) growth rate of dividends of 8%

Answer 1

The stock price per share for a stock with a required return of 12%, an expected annual dividend of $3.15, and a growth rate of dividends of 8% is $78.75, calculated using the Gordon Growth Model.

Step-by-step explanation:

The stock price per share for a stock with a required return of 12%, an expected annual dividend of $3.15, and a constant growth rate of dividends of 8% can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model). According to this model, the price of a stock is equal to the next year's expected dividends divided by the difference between the required rate of return and the dividend growth rate. The formula can be expressed as:Price = D1 / (r - g)
Where D1 is the expected dividend next year, r is the required rate of return, and g is the dividend growth rate. Substituting the values we get:

Price = $3.15 / (0.12 - 0.08)
Price = $3.15 / 0.04
Price = $78.75 per share
Thus, the stock price per share in this case would be $78.75.

Answer 2

Price per share = $78.75

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.

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:

Price=Do (1+g)/(k-g)

Where Do- Dividend now, g- growth rate, k- required rate of return(cost of equity)

Note Do (1+g) represents the expected dividend in the first year

DATA:

Do (1+g) = 3.15

g= 8%

k= 12%

Price per share = 3.15/(0.12- 0.08) = $78.75

Price per share = $78.75