Question

A stock just paid a dividend of $2.00. Dividends are forecasted to grow at a rate of 6% for the next 9 periods. You forecast that at time 9 you will sell the stock for $60.00. What is the current value of the stock, given that the required return for this stock is 12.4% ?

Answer 1

To calculate the current value of the stock, we can use the dividend discount model (DDM) and the future value of the stock at time 9.

The DDM formula for a stock with constant dividend growth is:

Current Value = Dividend / (Required Return - Dividend Growth Rate)

Given:

Dividend = $2.00

Dividend Growth Rate = 6% = 0.06

Future Value at time 9 = $60.00

Required Return = 12.4% = 0.124

Using the DDM formula, we can calculate the current value of the stock:

Current Value = $2.00 / (0.124 - 0.06)

Current Value = $2.00 / 0.064

Current Value ≈ $31.25

Therefore, the current value of the stock, given the provided information, is approximately $31.25.