Question

Tresnan Brothers is expected to pay a $4.00 per share dividend at the end of the year (i.e., D1 = $4.00). The dividend is expected to grow at a constant rate of 3% a year. The required rate of return on the stock, rs, is 9%. What is the stock's current value per share? Round your answer to the nearest cent.

Answer 1

$66.67

Step-by-step explanation:

Using dividend growth model

P0 =
`(D1)/(Ke-g)`

Where P0 = Current market price of share

D1 = Dividend at year end

Ke = Expected return

g = growth percentage

Since D1 has been provided we will take D1 else formula is D0 + g for calculating D1

Putting the values as provided we have

P0 =
`(4)/(0.09-0.03)`

=
`(4)/(0.06)` = $66.67