Question

A stock is expected to pay a dividen of $0.75 at the end of the year. The required rate of return is 10.5%, and the expected constant growth rate is 8.2%. What is the stock's current price

Answer 1

P0 = $32.60869565 rounded off to $32.61

Step-by-step explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

• D1 is dividend expected for the next period

• g is the growth rate

• r is the required rate of return

P0 = 0.75 / (0.105 - 0.082)

P0 = $32.60869565 rounded off to $32.61