Question

An issue of common stock has just paid a dividend of $2.00. Its growth rate is equal to 4%. If the required rate of return is 7%, what is its current price

Answer 1

The answer is $69.33

Step-by-step explanation:

The formula to solve this is:

P = D1/r - g

P is the Curren price of the common stock

D1 is the future dividend payment

r is the rate of return

g is the growth rate

D1 is $2 x 1.04 = $2.08

r = 7% or 0.07

g= 4% or 0.04

2.08/0.07-0.04

2.08/0.03

=$69.33.

Therefore, the current share price of the common stock is $69.33