Question

Maxwell Communications paid a dividend of $1.20 last year. Over the next 12 months, the dividend is expected to grow at 13 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 17 percent. Compute the price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

The price of the stock is
`P_o = \$ 33.9`

Explanation:

From the question we are told that

The dividend is
`k = \$ 1.20`

The expected growth rate is
`r = 13\% = 0.13`

The required rate of return is
`K_e = 17 \% = 0.17`

The new dividend after 12 months is mathematically represented as

`D_1 = k * (1 + r)`

substituting values

`D_1 = 1.20 * (1 + 0.13)`

`D_1 = \$ 1.356`

The price of the stock the price of stock is mathematically represented as

`P_o = (D_1)/( K_e - r )`

substituting values

`P_o = ( 1.356)/( 0.17 - 0.13 )`

`P_o = \$ 33.9`