Question

Royal Bank common shares pay dividends annually. They just paid a​ $1.50 dividend. Stock holders require a return of​ 12%. Royal is expected to continue paying dividends that will grow at​ 3.5% per annum in perpetuity. What is the fair price of a share of Royal Bank​ stock?

Answer 1

Answer: $18.26

Step-by-step explanation:

The Dividend discount model can be used to calculate he fair price of the Royal bank stock.

The formula is;

= Next dividend/ ( Required rate of return - growth rate)

= ( 1.5 * ( 1 + 3.5%))/ ( 12% - 3.5%)

= $18.26