Question

What is the stock price per share for a stock that has a required return of 16%, an expected dividend $2.7 per share, and a constant growth rate of 10%

Answer 1

Price of stock = $49.5

Step-by-step explanation:

The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:

Price of stock=Do (1+g)/(k-g)

Do - dividend in the following year, K- requited rate of return , g- growth rate

DATA:

D0- 2.7

g- 10%

K- 16%

Price of stock = ( 2.7×1.1)/(0.16-0.1) = 49.5

Price of stock = $49.5