Question

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.00 next year. The growth rate in dividends for all three companies is 6 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company?

Answer 1

The the stock price for each company is:

Red = $150 per share

Yellow = $60 per share

Blue = $37.50 per share

Step-by-step explanation:

as per the devidend growth model, the share price can be given by:

Po = D1/(ke-g)

Po is the share price today

ke is the required rate of return

g is the growth rate on devidend

Red = $3/(0.08 - 0.06)

= $150 per share

Yellow = $3/(0.11 - 0.06)

= $60 per share

Blue = $3/(0.14 - 0.06)

= $37.50 per share

Therefore, The the stock price for each company is:

Red = $150 per share

Yellow = $60 per share

Blue = $37.50 per share