Question

Suppose Big D, Inc., just paid a dividend of $0.785 per share. It is expected to increase its dividend by 2% per year. If the market requires a return of 12% on assets of this risk, how much should the stock be selling for? in dollars

Answer 1

The stock should be selling at = $8.007

Step-by-step explanation:

The price of a stock according to the dividend valuation model is the present value of the future dividends expected from the it discounted at the required rate of return.

This model can be denoted using the following notations:

PV = D(1+g)/(r-g)

PV = (0.785 × (1.02))/0.12-0.02

PV = $8.007

The stock should be selling at = $8.007