Question

A share of Lash Inc.'s common stock just paid a dividend of $2.10. If the expected long-run growth rate for this stock is 5%, and if investors' required rate of return is 18.5%, what is the stock price

Answer 1

P0 = $16.333333333 rounded off to $16.33

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 = D0 * (1+g) / (r - g)

Where,

• D0 * (1+g) is dividend expected for the next period

• g is the growth rate

• r is the required rate of return

P0 = 2.1 * (1+0.05) / (0.185 - 0.05)

P0 = $16.333333333 rounded off to $16.33