Question

Shara Miselle Co. just paid a dividend of $1.65 (D0) on its common stock. This company's dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value per share of Shara Miselle stock.

Answer 1

$21.24

Step-by-step explanation:

The computation of the current value per share is shown below:

Given that

Last dividend = $1.65

Expected growth = 3% annually.

Required rate of return = 11%

Based on the above information

The dividend after n years is

= $1.65 × (1 + 3%)^n

And, the Present value of dividend after n years is

= $1.65 × (1 + 3%)^n ÷ (1 + 11%)^n

Now the current value per share of the stock is

= Total Present value of all dividends

= $1.65 × (1 + 3%)^1 ÷ (1+11%)^1 + $1.65 × (1 + 3%)^2 ÷ (1+11%)^2 + $1.65 × (1 + 3%)^3 ÷ (1 + 11%)^3+...+$1.65 × (1 + 3%)^n ÷ (1+11%)^n+...

= $1.65 × (1 + 3%) ÷ (1+11%) × [1 + (1 + 3%)^1 ÷ (1 + 11%)^1 + (1 + 3%)^2 ÷ (1 + 11%)^2 + ...]

= $1.65 × (1 + 3%) ÷ (1 + 11%) ÷ [1 - (1 + 3%) ÷ (1 + 11%)]

= $21.24375

= $21.24