Question

Stoneheart Group is expected to pay a dividend of $3.15 next year. The company's dividend growth rate is expected to be 4 percent indefinitely and investors require a return of 11.6 percent on the company's stock. What is the stock price?

Answer 1

P0 = $41.44736842 rounded off to $41.45

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 /year

• g is the growth rate

• r is the required rate of return

P0 = 3.15 / (0.116 - 0.04)

P0 = $41.44736842 rounded off to $41.45